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

Weekly Investment Commentary

The Slowly-Growing Economy Should Persist for Some Time

May 26, 2015
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Key Points

  • U.S. and global economic growth remain uneven, but should accelerate over the coming quarters.
  • The Fed is likely to raise rates later this year, which may cause volatility to pick up.
  • As long as bond yields don’t rise dramatically, the equity bull market should persist.

There was little meaningful direction in equity markets last week. Global bond yields generally rose and economic data was mixed. U.S. equities posted modest gains, with the S&P 500 Index rising 0.2%.1 The consumer staples sector was the worst-performing area of the market, while health care, financials and technology led the way higher.1


Weekly Top Themes

  1. A noticeable economic acceleration has failed to materialize. We continue to believe that the weakness in first quarter growth was due to temporary factors, but so far, the data from the second quarter has failed to show much additional traction. Overall, we think the preponderance of important data (including jobs growth, housing and retail sales) suggest slow but sustained economic progress.
  2. Housing is an area that may be improving. One strong reading certainly doesn’t make a trend, but the 20% jump in U.S. housing starts in April was impressive.2 At an annual rate of 1.135 million, housing starts reached their highest level since November 2007.2 We believe the increase provides further evidence that the earlier-year slowdown was weather-related, and we expect the housing market will continue to improve, albeit at a more modest pace.
  3. Inflation is slowly but surely rising. The headline Consumer Price Index climbed 0.1% in April, in line with expectations.3 Core inflation, however, was up 0.3%, its highest reading since August 2011.3 As a result, the annualized three-month rate of core inflation has climbed from 1.3% in January to 2.6% in April.3
  4. Janet Yellen’s remarks suggest the Federal Reserve is on track to raise rates later this year. In her speech to the Greater Providence Chamber of Commerce, the Fed Chair indicated that the recent slowing in economic growth has been due to transitory factors. Nothing she said indicated that the Fed is shifting its stance, and we believe September remains the most likely time frame for the first rate hike.
  5. Global growth remains uneven. U.S. growth has downshifted, but we expect the U.S. economy will gain some strength in the coming quarters. Europe appears to finally be recovering from recession and we believe this region will provide more of a tailwind for world growth. China, in contrast, appears to be continuing to experience a slowdown in growth and we do not believe this will change any time soon.

Yields May Rise, but Equities Should Survive

Financial market volatility has eased as the recent rise in bond yields and the advance in oil and commodity prices appears to be leveling off. We believe this is a temporary calming and expect we’ll see more volatility when the Fed finally decides to lift rates. Most of the pain will probably be felt in government bonds, but equities and other areas of the fixed income market are likely to face higher volatility as well.

Given our outlook that U.S. growth will improve, the global economy is firming, inflation is starting to pick up and the Fed is set to move rates higher, we think it is all but inevitable that we will also see a rise in bond yields. The pace and magnitude of the increase will be critical in determining how equity markets respond. If the rise in yields is gradual, there is a good chance that the bull market can continue and that valuations can become more stretched before the current cycle of rising stock prices comes to an end. In contrast, if yields rise quickly or dramatically, there would be a much greater chance of a significant downturn for equities.

The Fed is highly attuned to the state of financial markets and wants to help allow the current economic expansion to continue. The Fed is obviously aware that economic data remains mixed and has emphasized clearly the importance of key data when considering rate increases. As such, the Fed should move slowly and deliberately when it does act. A cautious Fed, combined with the fact that monetary policy easing continues in many parts of the world, should prevent yields from rising in a manner that would disrupt the equity bull market.

So we do not believe that rising rates will end this bull market, but we also believe a rebound in corporate earnings would be required for equities to make further gains. The good news is that it looks to us like earnings momentum has been picking up over the last month. As such, the balance of evidence suggests that stock prices can still rise from here.


1 Source: Morningstar Direct, as of 5/22/15
2 Source: Commerce Department
3 Source: Labor Department


Last Week's Commentary

Equities Push Ahead Despite Softening Economic Growth

May 18, 2015

Key Points

  • U.S. and global economic growth should improve in the coming months, but areas of the world are still in need of policy support.
  • The advance in global bond yields should persist, but rates will likely move slowly and unevenly higher.
  • These factors suggest tailwinds for the equity market may strengthen later this year.

The continued advance in global bond yields dominated the financial story again last week, although this trend eased slightly by the end of the week. Economic data featured a relatively weak retail sales report. Notwithstanding these factors, U.S. equities advanced, with the S&P 500 Index hitting another record high as it gained 0.4%.1 The consumer staples, health care, industrials and technology sectors led the way, while energy was the worst-performing area of the market.1


Weekly Top Themes

  1. Retail sales figures are not climbing as anticipated. Despite solid employment gains, retail sales were flat for April, suggesting that consumers are continuing to save rather than spend.2 We expect spending levels to rise in the coming months, but the consumer sector is not currently helping growth as much as many anticipated.
  2. U.S. economic growth is not yet accelerating. Following a weak first quarter, most economic data suggest that the second quarter has not yet picked up noticeably. We would not be surprised to see first quarter gross domestic product growth revised lower. While the second quarter should be better than the first, those numbers may also be disappointing.
  3. It will be difficult for the "Goldilocks" investing backdrop to persist. For the past six years, investors enjoyed an economic backdrop strong enough to push most asset classes higher but not so strong that inflation or tightening monetary policy emerged as threats. With uneven economic growth and emerging signs of wage inflation, we believe the investing environment is becoming more difficult and that selectivity is growing in importance.
  4. Global growth prospects appear mixed. We expect Europe to become a stronger tailwind for the world economy thanks to low commodity prices, a cheaper euro and an accommodative central bank. In contrast, it looks to us like Chinese growth will continue to decelerate.
  5. Overall, we believe the global economy will improve in the coming months. The "stronger dollar/weaker commodities" trade that emerged in the middle of last year indicated investors were expecting global growth to be soft as deflation fears were rising. We have begun to see the strength of that trade diminish with deflation risks fading and growth prospects improving.

Investor Confidence Should Pick Up in the Coming Months

Concerns over deflation are fading as it becomes increasingly clear that global growth is recovering. Economic conditions around the world and in the United States remain uneven, but we still believe that Federal Reserve rate hikes are inevitable. As we approach the first rate increases, investor anxiety will likely increase as worries mount that the Fed will become too aggressive and act in a manner that is detrimental to economic growth. It may seem odd that this would become a concern considering how dovish the Fed has been and how much central bankers have focused on transparency. But the 2013 "taper tantrum" taught us that investors are prone to overreaction and that once yields start rising, many will become concerned about the possibility of deflation and economic stagnation.

Because of these concerns, one of the prominent near-term risks for equities is that bond yields will advance too quickly, which could trip up the stock market. We think such a scenario is unlikely. Improving global growth and a pending shift in Federal Reserve policy will put upward pressure on bond yields. But many regions of the world are still in an easing cycle, which should prevent yields from advancing too dramatically. For its part, the Fed should proceed cautiously so as not to risk slowing U.S. growth. Once the Fed starts to act, we believe investor confidence will rise. As such, we expect any setbacks in equities that result from rising rates to be temporary.

Likewise, we believe the dramatic volatility in currency and commodity markets is starting to fade. These markets remain unsettled and may continue to be choppy for some time, but should calm somewhat. Increased stability should provide a further boost to investor confidence. Overall, we acknowledge clear risks to the global economy, but we continue to advocate a pro-growth investment stance and favor overweight positions for equities.


1 Source: Morningstar Direct, as of 6/20/14
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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