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Weekly Equity Market Commentary

Stocks start 2022 with losses amid rising rates

Equities Investment Council
The Nuveen Equities Investment Council is led by Saira Malik and comprises the firm’s senior portfolio managers averaging three decades of investing experience.
Saira Malik
Chief Investment Officer, Equity
Equities Investment Council member Saira Malik

Weekly market update highlights

Global equities struggled to find their footing in the first week of 2022, as most major indexes lost ground. Within the U.S., more value and cyclically oriented benchmarks fared better. The DJIA fell a modest -0.3%, while the S&P 500 and Nasdaq lost 1.8% and 4.5%, respectively, due in large part to their heavy weightings in technology. Broad-based, non-U.S. benchmarks fell more modestly. The MSCI EAFE (-0.3%), ACWI ex-USA (-0.4%) and EM (-0.5%) indexes lost no more than -0.5%, each.

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Market drivers & risks

The next few months could remain challenging for investors, and continued high volatility and possible near-term market selloffs are likely.

Weekly overview

Risks to our outlook

Inflation and its impact on central bank policy will continue to exert outsized influence on equity market volatility. The Fed’s hawkish tone has become more aggressive, causing investors to grow wary of a potential misstep in timing or magnitude of contractionary measures.

Even as markets have seemingly concluded that Omicron does not pose a substantial threat, we still expect volatility to spike with each related headline. Although another Covid wave had been anticipated, the fear of economic restrictions will likely remain.

Congress continues to pose a risk despite reaching a one-time resolution on the debt limit. The $1.7 trillion “soft” infrastructure spending package remains in jeopardy, given the Democrats’ razor-thin majority and significant objections from within their ranks.

Geopolitical risks have recently expanded, as tensions between China and the U.S. are brewing again. Further sanctions on Chinese tech firms will likely hamper emerging markets, given China’s sizable weighting within the broad-based EM indexes.

Best ideas

In the U.S., inflation and expectations for higher yields should bolster returns for small caps and financials, as well as for companies with pricing power. Stronger producer discipline and global demand should help extend the cycle for Energy, while select technology companies, such as front-office software leaders, also look attractive. The prospect of stronger relative earnings growth could be a catalyst for select stocks in developed non-U.S. markets, particularly Europe, and select emerging markets (ex-China, given current risks). We continue to advocate a long-term approach that prefers cyclicals and value stocks exhibiting strong earnings growth and pricing power.

In focus: Renewing the case for utilities

The growth outlook for the utilities sector remains bright following a return of nearly 18% in 2021 — its third-highest gain in the past decade. Valuations look attractive, as the sector is currently trading at a discount of approximately 10% to the S&P 500 Index, with a P/E ratio of 19.2x versus 21.4x, based on estimated 2022 earnings per share (EPS).

But the investment potential goes beyond relative valuations. Most utility conglomerates have streamlined their operations, turning into pure-play regulated utilities – which investors typically prefer due to the stability and predictability of earnings that these businesses offer.

Meanwhile, the capital expenditure landscape for utilities is as vibrant as ever, with significant opportunities to invest in energy transmission, system reliability and modernization. We think current capex budgets for utility companies support EPS compound annual growth rates of 5% to 8% over the next five years.

Perhaps the most compelling rationale for the sector is the near-universal effort by its constituent companies to reduce greenhouse gas emissions by steadily retiring high carbon-emitting (e.g., coal-fired) power plants and investing in renewable energy alternatives such as wind and solar. These offer lower construction and operating costs while also helping combat climate change.

As renewable power plants grow in number, so does the regulated asset base for the companies that run them. Shareholders, in turn, should benefit from the substantial and predictable earnings growth fueled by this industry-wide decarbonization.

Related articles
Weekly Fixed Income Commentary Covid optimism and a hawkish Fed boost Treasury yields
U.S. Treasury yields rose as concerns over Covid eased, with the Omicron variant seemingly less deadly than prior strains.
Equities Opportunities and risks in emerging market equities
Our equity team offers its perspective on these topics and a cautiously optimistic conclusion in the analysis that follows.
Investment Outlook 2022 outlook: Slower. But still pretty fast.
Our overall thoughts are that 2022 should look quite a bit like 2021 — with some key differences. In this environment, Nuveen’s Global Investment Committee still sees a number of opportunities across asset classes.

Endnotes

Sources

All market data from Bloomberg, Morningstar and FactSet

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.

Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.

A word on risk 

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 investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income.

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