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Weekly Commentary

Inflation fears weaken investor sentiment

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

The S&P 500 fell by 2.5% for the week, with growth stocks outperforming value for the first time in nine trading sessions. The rotation into value may have been temporarily stalled, due to potentially oversold conditions combined with decreasing yields. The consumer discretionary and technology sectors fell by nearly 5% and 4%, respectively, while utilities also fell by 5%. Energy was the lone weekly gainer, adding 4.3%, while financials and industrials lost the least.

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Weekly overview

Market drivers & risks

We have been anticipating a sentiment-driven pullback fueled by fears of inflation, as rapidly rising yields startled investors last week.

Risks to our outlook

Disorderly yield growth and inflation risks remain our biggest near-term concerns. Any indication of an impending tapering of quantitative easing may cause investors to overreact, resulting in a possible pullback (as we witnessed last week).

Coronavirus variants remain at the forefront of possible risks, given their propensity to spread more quickly, the capacity 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, technology and consumer-related industries within emerging markets appear attractive.

In focus: Continued recovery in financials

The financial sector was one of the biggest laggards of 2020, but is now the second-best performing sector in the S&P 500 this year, behind energy. The combination of vaccinations, stimulus and better-than-expected consumer-credit quality and savings have helped the sector return to more-normalized valuations, especially within the banking and consumer-focused credit card industries. While certain earnings drivers may remain weak (e.g., loan growth), we expect financials to be a relative outperformer, given improving fundamentals supported by economic growth, rising rates and improving capital return, especially in the second half of 2021.

Following a decade of relative underperformance outside the U.S., we believe that the sector is benefiting from similar top-down tailwinds. We have observed a broad swath of European banks making positive revisions to their fourth quarter 2020 earnings – something we have not experienced in the last five years. Furthermore, the quality of these revisions has been much higher than expected, based on solid balance sheets, fee income strength and lower credit costs.

Investors have already accounted for many of these improvements and tailwinds. However, we believe the rotation away from growth and defensive areas into more value and cyclical names will continue to drive the financial sector in 2021, improving the capital return environment for yield-hungry investors.

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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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