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

Weekly Investment Commentary

Global Economic Growth Should Gradually Begin to Improve


January 26, 2015
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Key Points

  • The ECB easing program should help stave off deflation and improve investor sentiment.
  • We expect U.S. and global economic growth will improve this year.
  • Market volatility is likely to persist, but equities appear set to advance over the course of 2015.

Equity markets reacted to both positive and negative forces last week, but the positive factors won out in the end. Corporate earnings sentiment was lackluster and investors continued to focus on the negative effects of falling oil prices. However, markets experienced a significant tailwind from a more aggressive-than-expected quantitative easing announcement from the European Central Bank (ECB). For the week, the S&P 500 Index climbed 1.6%, snapping a three week losing streak.1

 

There is More to Be Done, but ECB Easing Should Help

We expect the ECB’s new easing program will be moderately effective in helping to stave off deflation and boost growth. There is still more work to be done in Europe, however, and the dangers are far from over. We believe the eurozone needs significant structural reforms, which do not appear to be on the horizon. In any case, the new program should be a positive, and the weaker euro, the fall in oil prices and some healing in the banking sector should also help the eurozone. Looking ahead, we believe eurozone growth is more likely to surprise to the upside than the downside. We also believe the move should improve investor sentiment and put some much-needed upward pressure on global inflation expectations.

 

Weekly Top Themes

  1. Economic weakness outside of the United States is helping U.S. growth. Slower growth in China is one factor putting downward pressure on oil prices and European deflation threats are keeping global interest rates depressed. Both of these trends are contributing to the consumer and business sectors of the U.S. economy.
  2. U.S. earnings trends appear to be following the pattern of global divergence. At this point, fourth quarter estimates are that U.S.-oriented companies will see earnings growth of 11%, while globally-oriented companies will experience a drop of 1%.2
  3. Although a number of factors are keeping interest rates low, we expect yields to rise in 2015. Our list of reasons includes a solid U.S. economy, a possible stabilization in oil prices, the likelihood of the Federal Reserve increasing rates and some healing in the eurozone.
  4. In an unusual confluence, both the federal budget deficit and trade deficit are falling simultaneously.3 These trends are putting upward pressure on the dollar and should help support U.S. equities.
  5. The creditworthiness of oil-producing companies and countries appears to be deteriorating. Credit spreads for both have been widening in recent weeks.1
  6. Chinese economic growth slowed to 7.4% last year,4 and we believe weakness will persist. We expect Chinese corporate earnings, consumer spending and investment growth will all decline in 2015.
  7. Relative equity and bond market yields suggest the outlook for stocks could be strong. For just the fourth time in the last 50 years, the dividend yield on the S&P 500 has moved above that of the 10-year Treasury. In the other three instances, equities advanced 25%, 35%, and 33% over the following twelve months.5
 

The Outlook for Equities Remains Solid

Financial markets have been experiencing a pocket of volatility, which has undermined investor confidence. We do expect that oil prices will stabilize and experience a moderate bounce from oversold levels, which should help calm the markets. Over the next twelve months, we have a constructive view toward risk assets. U.S. economic growth is improving, corporate earnings should be decent (outside of commodity-related sectors) and the fiscal drag is fading. The Fed is likely to raise rates, but will do so carefully and modestly. Outside of the U.S., reflationary support in Europe and Japan should help global growth. Investors should remain prepared for a bumpy ride in 2015, but by the end of the year, we expect equity prices will be higher than where they began.

 

1 Source: Morningstar Direct and Bloomberg, as of 1/23/15
2 Source: RBC Capital Markets
3 Source: U.S. Treasury Department and the Bureau of Economic Analysis
4 Source: China’s National Bureau of Statistics
5 Source: Bespoke Investment Group



 

Last Week's Commentary

Despite Escalating Volatility, U.S. Fundamentals Remain Sound


January 20, 2015
 

Key Points

  • Equity markets are likely to remain vulnerable until oil prices stabilize.
  • Investor sentiment has become depressed, but we think it is out of sync with increasing evidence of an improving global economy.
  • Fundamentals suggest that 2015 should be a positive year for global equities.

U.S. equities declined for a third straight week, with the S&P 500 Index dropping 1.2%.1 Defensive areas such as utilities and telecommunications were the best-performing sectors, while the financial sector was hit the hardest.1 Notwithstanding last week’s decision by the Swiss National Bank to remove its currency peg, the fundamental backdrop has not changed much in recent weeks. We attribute the fall in equity prices to ongoing worries about the collapse in oil prices and the ripple effect on the global financial system.

 

Weekly Top Themes

  1. Retail sales levels fell in December, but longer-term trends remain positive. Sales excluding gasoline dropped 0.4% last month,2 but we think it would be an overreaction to suggest that the retail sector is in trouble. Over the past six and twelve months, sales ex-gas were up 4.4% and 5.3%, respectively.2
  2. Inflation looks steady, but may be due to fall. The headline Consumer Price Index (CPI) fell 0.4% in December and core CPI was unchanged.3 Core CPI was up 0.8% year-over-year.3 Given the sharp decline in energy prices, we expect core CPI may turn negative in February or March.
  3. We believe lower oil prices produce a net benefit to the U.S. economy. Declining oil prices help consumers and users of energy. Oil producers are hurt by this trend, but this group is relatively small. Nonfarm payrolls show 140 million people are employed in the United States, with 931,000 working in the oil and gas industry.4 In other words, less than 1% of total U.S. employment is based in the energy sector.
  4. Near-term earnings trends may be disappointing, but we remain optimistic about the coming year. As the fourth quarter earnings season begins, current S&P 500 estimates are for a paltry 1% year-over-year gain, with weakness centered in the energy sector.5 Looking ahead, we believe an improving economy and healthy profit margins should help corporate earnings to rebound.
  5. The U.S. dollar may be overdue for a pullback. The dollar has rallied substantially over the past few months, due to falling oil prices plus diverging economic growth and monetary policies between the United States and other countries. We think these long-term trends will persist, but some sort of near-term consolidation or counter-rally in the dollar may occur.
  6. European growth remains under pressure. We expect the eurozone to continue to struggle as long as bank lending remains depressed, inflation remains close to zero and governments remain unwilling to increase spending. The growing possibility of additional easing action by the European Central Bank (ECB) will help, but likely won’t be enough to pull Europe out of its doldrums.
  7. Investors have a long list of events and data to react to this week. Earnings results will get their share of attention, and this week also features a rash of Chinese economic data, the President’s State of the Union address, an ECB meeting and elections in Greece.
 

Sentiment Falters, Yet Equities Still Look Attractive

The sharp decline in oil has contributed to a fall in equity prices and in bond yields, as it has sparked global deflation fears and undermined confidence in the global economy. The fundamental supply and demand factors behind falling prices are real, but we believe prices may have overshot and the current turmoil should diminish. The souring of investment sentiment seems out of sync with increasing evidence of economic acceleration.

The pickup in volatility is unnerving, but we encourage investors to ride out the equity market turbulence. Those with longer-term horizons may want to consider using periods of weakness to add to positions as well. We expect the coming year to be a positive one for global equities in both absolute terms and relative to Treasuries. We think both the economy and corporate earnings are strengthening, and global monetary policy remains supportive. Commodity price volatility remains a risk, and equities are likely to remain vulnerable until oil prices stabilize. We think equities will be able to overcome this risk.

 

1 Source: Morningstar Direct, as of 1/16/15
2 Source: U.S. Department of Commerce
3 Source: Bureau of Labor Statistics
4 Source: Deutsche Bank Research
4 Source: MRB Partners



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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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