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Weekly commentary

Stocks remain quiet. For now.

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
CIO, Head of Global Equities
Equities Investment Council member Saira Malik

Highlights

Results were mixed across broad-based indexes, split between modest gains and losses for the holiday-shortened week of trading. Energy and financials each added 3.5% and 2.8%, respectively, while technology, health care and utilities lagged.

Weekly overview

Market drivers & risks

We believe the strength and momentum of the broad economy will continue to support equity markets, as well as limit a potential market correction.

Risks to our outlook

Disorderly yield growth and inflation risks remain our biggest near-term concerns, as any indication of an impending tapering of quantitative easing may cause investors to overreact, resulting in a possible correction. 

Coronavirus variants remain at the forefront of possible risks, given their propensity to spread more quickly, the possibility to be more deadly and the potential to disrupt economic reopenings. Additionally, stimulus-driven volatility is likely to persist until a package has been passed. 

We are also monitoring valuations. Bitcoin’s recent surge indicates investor exuberance, with price momentum reaching dot-com, bubble-era levels. While a short-lived, sentiment-driven correction is possible, economic and earnings growth should continue to underpin investor confidence.

Best ideas

We continue to believe U.S. small caps offer value and remain favorable, as they are poised to benefit from a re-opened economy and stimulus. Overall, our key investment theme centers on looking for quality across geographies, sectors and industries. Additionally, consumer-related industries within emerging markets appear attractive.

In focus: Going global for better returns

Non-U.S. equities have lagged U.S. markets, as the S&P 500 outperformed MSCI EAFE in 8 of the last 10 years. Will the trend soon reverse? A number of factors support the case that 2021 may be the year to seek better returns outside of the U.S.

The combination of extensive fiscal and monetary policy stimulus, along with the ending of the pandemic, are likely to lead to a strong, synchronized global economic recovery this year. Rising inflation expectations are pushing interest rates higher. While these factors support value stocks outperforming growth and cyclicals outperforming defensives, what does it mean for international equity versus the U.S.?

Index composition factors come into play when comparing EAFE to the S&P 500. First, information technology represents close to 28% of the S&P 500 compared to 9% for EAFE. To compensate, EAFE is overweight industrials by 7%, financials by 7% and materials by 5%. The U.S. market has understandably outperformed over the last decade, as growth stocks, led by technology, have trounced value stocks in a world of declining interest rates and sub-trend global growth.

But should above-trend global growth and higher interest rates materialize, 2021 may be a better environment for value and cyclical stocks relative to their growth and defensive peers. International developed markets may contain more fertile ground for investing than the U.S. The U.S. dollar has struggled relative to foreign currencies over the last eight months, adding to the case for overseas returns.

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Dimitri Stathopoulos
United States
Endnotes

Sources

All market data from Bloomberg, Morningstar and FactSet
Manufacturing data from the Institute for Supply Management.
Equity flows data supply by Bank of America.
 
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