Robert C. Doll, CFA
Senior Portfolio Manager,
Chief Equity Strategist
Nuveen Asset Management, LLC

Weekly Investment Commentary

Global Reflation Should Allow Equities to Push Higher

February 23, 2015
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Key Points

  • Financial markets reacted well to the provisional Greek bailout extension, but risks for Europe remain elevated.
  • Wages appear to be starting to climb, which would increase pressure on the Fed to begin rate increases this summer.
  • There is a valid bearish case to be made, but we think the positives for equities outweigh the negatives.

U.S. equities climbed last week amid a fairly uneventful trading environment. The S&P 500 Index rose 0.7%, putting it 6.5% above the low of just a few weeks ago.1 The drama surrounding Greece’s financial woes dominated the headlines, while Walmart’s decision to boost pay for one-third of its workforce also received its share of attention. For the week, the health care sector was the best-performing, with leadership from the biotech industry, while energy companies struggled in the face of a downturn in oil prices.1


Weekly Top Themes

  1. The “pro-growth” investment trade remains in effect but slowed last week. Global economic data was mixed. Europe showed some improvement, but Japanese fourth quarter economic growth came in well below expectations at 2.2%.2 Bond yields were marginally higher last week, while commodity prices fell and cyclical stocks slightly outperformed defensive sectors.1 Nevertheless, U.S. stocks ended the week at another record high.1
  2. The provisional Greek debt deal is a positive, but the risks are still high. The four-month extension of the bailout program effectively served as a capitulation by the new Greek government in their stance to abandon anti-austerity measures. Greece still has much work to do, but the agreement to have its budget programs approved by the so-called “troika” of the European Central Bank, the European Commission and the International Monetary Fund reduces the risk of a messy exit by Greece from the European Union. Even assuming the provisional deal goes through, however, it only lasts for four months. The worries over Greece have only faded, not vanished completely.
  3. The eurozone economy appears to be slowly improving. Business, investor and consumer confidence have been ticking up,3 which should translate into an easing of deflation fears and better growth. Europe still faces a number of headwinds, including the need for more structural reforms. At the same time, political turmoil in Greece and Russia could cause issues for the eurozone.
  4. Modest wage increases appear to be on the horizon. Last week’s news from Walmart continues a trend of companies announcing pay increases, and we believe the government’s official wage data will soon start to reflect higher salaries for American workers. The growth in new jobs and the decline in the unemployment rate are also putting upward pressure on wages. Wage levels are one of the Federal Reserve’s key economic barometers used to judge the state of the economy, so such increases should prompt the Fed to begin normalizing interest rates. We believe this summer is the most likely timeframe for the Fed to act.
  5. When the Fed does begin to increase rates, we believe it will have a number of effects on financial markets. For the bond markets, we expect Fed action would cause short-term yields to move up while longer-term yields would move erratically higher. This would result in a flatter yield curve (known as a “bear flattener”). We also think credit spreads may widen and the U.S. dollar should rise. For equity markets, we believe a move by the Fed would increase volatility, but we would still expect equities to grind higher.

The Bullish Case for Equities Appears Intact

Equities are currently testing the tops of their recent trading ranges, and we think whether this is resolved by stock prices moving higher or by falling back will depend on the tug-of-war between ample global liquidity and a slight softening in corporate profits. Easy monetary policy, the drop in oil prices and the rise of the U.S. dollar have all been positive factors for the consumption-oriented U.S. economy, but they have also put downward pressure on U.S. profits.

The bulls believe global reflation and a stronger U.S. economy will help global growth and allow investors to look past the current corporate profit softness. The more bearish case is that still-lingering deflation will work its way into the U.S. economy just as the Fed is starting to raise rates. We acknowledge the downside risks, but lean more toward the bullish arguments.


1 Source: Morningstar Direct and Bloomberg, as of 2/20/15
2 Source: Cabinet Office of Japan
3 Source: The European Commission


Last Week's Commentary

Investor Sentiment Is Strengthening

February 17, 2015

Key Points

  • Easing geopolitical issues and stabilizing oil prices are helping markets move past recent weakness.
  • Deflationary fears are receding, which should put upward pressure on bond yields.
  • We expect global equity markets will make further gains in the coming months as the world economy improves.

U.S. equities finished higher for a second straight week, with the S&P 500 Index gaining 2.1% as it ended the week at a record high.1 Investors largely shrugged off disappointing retail sales figures and chose to focus on the positives. Sentiment improved as a result of signs of a potential debt restructuring deal between Greece and the European Union as well as from a cease fire agreement in Eastern Ukraine. An additional climb in oil prices also helped boost equity markets. The technology sector was the best-performing area of the market last week, while utilities was the only sector that posted negative returns.1


Weekly Top Themes

  1. We expect the consumer sector to exhibit strength in 2015. Employment gains in manufacturing, construction and in state and local governments appear to be on the horizon. Also, low interest rates and lower energy prices should prompt consumers to pick up spending as the year progresses. We anticipate disposable personal income levels will accelerate in the coming months.
  2. For now, weak retail sales figures show that consumers are still exercising caution. January sales were down a disappointing 0.8% last month,2 although that figure may be skewed by a drop in spending at gas stations.
  3. It appears that a Greek debt restructuring deal may be on the horizon. Nothing has been settled yet, but the Greek government and the European Union do appear to be approaching a compromise. Any such deal is likely going to require Greece to give up on its demands for a significant reduction in its debt obligations in exchange for the country being allowed to run a smaller primary budget surplus.
  4. Non-U.S. growth continues to struggle. We have been seeing some signs of improvement in European growth, but Chinese economic growth seems to be weakening, Russian GDP growth is plummeting and Brazil may be moving into a recession.
  5. It is possible progress could be made in trade legislation. When it comes to most issues, Washington appears to be mired in gridlock, but if there is one area where we may see some legislative progress, we would expect it to be trade policy.

We Expect Equity Prices and Bond Yields to Climb

Since the end of January, global financial markets have started to stabilize. Although deflation worries and geopolitical risks are likely to keep volatility relatively elevated, we think there are some important factors that should provide ongoing support for equity markets. In particular, U.S. economic acceleration should act as a tailwind for the rest of the world, and global monetary policy remains extremely supportive.

The U.S. economic picture has brightened over the past year, and it seems obvious to us that the United States no longer needs the extraordinarily low interest rates the Fed adopted as part of its emergency measures during the height of the financial crisis. Regarding global monetary policy, several central banks are still in the early stages on their easing programs, which should help keep global financial liquidity ample when the Federal Reserve does begin interest rate increases. Financial market volatility is likely to increase when those rate hikes do begin, but we do not think this event will be enough to derail the bull market.

The months-long collapse in oil prices last year and into early 2015 resulted in a spike in deflation fears, which, in turn, caused bond yields to fall. Our view is that lower oil prices are, in the long term, a reflationary rather than a deflationary force. As a result, we expect yields will rebound in the coming months, which is one reason we believe equity markets look more attractive than bond markets. Thanks to an improving economy and still-solid earnings, the prospects for U.S. equities appear solid to us.

Outside of the United States, the outlook for equities is a bit more mixed, but global equity valuations still appear attractive and recent market strength in some troubled regions such as Europe may be a positive sign for the future. As global economic growth improves over the coming year, we believe both global equity prices and global bond yields should rise.


1 Source: Morningstar Direct, as of 2/13/15
2 Source: Department of Commerce

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A Word on Risk
The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-investment-grade bonds involve heightened credit risk, liquidity risk, and potential for default. Foreign investing involves additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. Past performance is no guarantee of future results. Certain information contained herein is based upon third-party sources, which we believe to be reliable, but is not guaranteed for accuracy or completeness.

Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc.

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