U.S. equities rose again last week as the S&P 500 increased 0.66%, with an overall gain for the year of 9.96%.1 The remarkable resilience of the U.S. economy against fiscal cliff headwinds has boosted equity investor sentiment. The U.S. macroeconomic outperformance has also helped U.S. equities outperform global counterparts. Investor preference toward the U.S. has largely been confirmed by rising flows into U.S. equities.
Growth Signals Remain Moderate but Steady
Over the last four months, the U.S. equity market (as measured by S&P 500) has increased approximately 16% as a result of injections of central bank liquidity and declining tail risks.1 Over the same period, economic and earnings trends have been mediocre. Eventually, fundamentals will have to improve more significantly or the rally will fade. Some observers complain that recent favorable economic data — the jobs report from the prior week and retail sales numbers last week — did not cause a noticeable increase in equity prices. This may be a sign that the market is tired and in a period of consolidation.
The world still faces significant problems that will likely keep growth moderate in 2013, especially relative to previous recoveries. Issues include the deep recession in southern Europe, Eurozone bank lending, an eventual exit by the Federal Reserve and a large debt-to-GDP ratio in aging developed countries.
Weekly Top Themes
- Retail sales jumped 1.1% in February:2 The U.S. consumer has shown strength in the face of higher taxes, delayed tax refunds and rising gasoline prices. Tailwinds include job growth and wealth appreciation that appear to be stronger than was previously anticipated.
- Industrial production rose 0.7% in February versus consensus of 0.4%:3 Manufacturing industrial production was stronger than expected.
- The Consumer Price Index (CPI) increased 0.7% in February:4 This was the largest monthly increase in over 3 ½ years, driven by a spike in energy prices (although this seems to be reversing in March). Core CPI (excluding food and energy) increased approximately 0.2%. Both the headline and core CPI numbers are up 2.0% year-over-year through February.
- New Federal Reserve data showed household net worth is at an all-time high:5Falling debt trends reveal a steadily improving picture.
- The continuing resolution for the federal government expires on March 27: Both the Senate and the House have been inspired to propose budgets, but neither party seems willing to compromise. This could create tension in the coming weeks.
Watch for the New Signs
The equity bull market has been underway for just over four years with global benchmarks gaining more than 100%. It is important to note that the recovery in corporate earnings has been almost as impressive as the rebound in stock prices. Persistent investor skepticism has prevented risk asset prices from outpacing under- lying fundamentals. Multiples have edged up slightly since the bull market began in 2009, but not nearly to the extent that would normally have accompanied a collapse in bond yields. In fact, stocks are relatively cheap and the equity risk premium remains near record levels. In our opinion, this leaves further upside as investor confidence in the economy strengthens.
Cyclical sectors in emerging markets have lagged somewhat because investors are still wary of embracing a positive global economic outcome. U.S. economic data has strengthened. Many thought the fiscal and political drag would not only trigger eco- nomic disappointment but also override positive hiring trends and budding revival in business investment. We believe the migration from seeking yield to buying growth will be slow to develop and requires evidence of stronger global growth, especially
in China.
WEEKEND UPDATE: CYPRUS
A proposal surfaced to tax savings deposits in Cyprus. If enacted, this will likely cause a fleeing of savings deposits to safer geographies. The latest attempt to bailout Greece would probably cause contagion risk in the weaker areas of Europe, a general temporary sell-off in risk assets and a flight to safety (e.g. Treasuries).
We have discussed that Europe’s financial problems were on a back burner but
had not disappeared. We believe there is a high probability that the negative contagion possibilities will cause this proposal to be withdrawn.
2013 Performance Year to Date
|
Returns |
||
|
Weekly |
YTD |
|
|
S&P 500 |
0.66% |
9.96% |
|
MSCI World (ex-U.S.) |
1.75% |
6.76% |
|
MSCI Emerging Markets |
-2.19% |
-0.95% |
Source: Morningstar Direct, as of 3/15/13. All index returns are shown in U.S. dollars. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. Index returns include reinvestment of income and do not reflect investment advisory and other fees that would reduce performance in an actual client account. All indices are unmanaged and unavailable for direct investment.
1 Source: Morningstar Direct, as of 3/15/13. 2 Source: U.S. Census Bureau, “Advance Monthly Sales for Retail and Food Services,” February 2013, http://www.census.gov/retail/ 3 Source: U.S. Federal Reserve, “Industrial Production and Capacity Utilization,” March 15, 2013, http://www.federalreserve.gov/releases/g17/current/ 4 Source: Bureau of Labor Statistics, “Consumer Price Index Summary,” March 15, 2013, http://www.bls.gov/news.release/cpi.nr0.htm 5 Source: U.S. Federal Reserve, “Flow of Funds Accounts of the United States, March 7, 2013, http://www.federalreserve.gov/releases/z1/ current/accessible/r100.htm
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. The MSCI World Index ex-U.S. is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets minus the United States. The MSCI Emerging Markets Index is a free float- adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
RISKS AND OTHER IMPORTANT CONSIDERATIONS
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, includ- ing 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.
Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc.
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