U.S. equities declined last week as the S&P 500 fell by more than 2.0%, which came on the heels of a new all-time high the prior week.1 Led by gold, commodities experienced volatility and declined over the past two weeks. Other detractors included disappointing first quarter Chinese economic numbers and somewhat softer U.S. releases.
The Ongoing Question (Part III): What Can Be Sustained?
Fiscal restraint provides a legitimate but finite threat, and second quarter growth in the U.S. is expected to dip to roughly 1%-1.5% relative to first quarter growth of 3%.2 Data show the tax hikes have been holding back consumers since January. The drag should dissipate somewhat in the second half, given the supportive financial conditions and reviving housing market.
The financial markets have become volatile as the plunge in gold prices has carried over to industrial commodity prices. Looking at this from a positive standpoint, lower commodity prices should help economic activity as well as help bring down inflation in emerging economies. Despite this silver lining interpretation, many investors are unwilling to look across the valley of economic uncertainty. Investors may see the decline of oil and commodity prices as a signal or reflection of weak demand, rather than a reduction of the economic drag.
Weekly Top Themes
1. The breakdown in gold is significant and potentially long term: Since gold has been functioning as a quasi-currency, modest improvement in the dollar and stabilization of the euro are negatives for gold. Other commodities such as oil have fallen in sympathy, but in our opinion, this is not connected to the gold decline in the long run.
2. Earnings are generally beating estimates across the board:3 Although it is early in the earnings season, topline trends are primarily sluggish and contain cautious comments about the future. The corporate operating environment is generally weaker than many people assumed in the first quarter. Due to cost management by banks and technology companies, earnings have remained intact. The full-year numbers of $108+ appear to be on track, even after expectations have dipped.
3. The 12-month rolling budget deficit has fallen below $1 trillion for the first time since 2009:4 This improvement is before any cuts from sequestration go into effect. Federal spending has declined by 3% and tax revenues have risen at a 10% annual rate for the past year. Continued improvements in the budget take pressure off of policymakers for a negotiated budget settlement. Thus, it does not seem likely that the U.S. has a near-term deficit problem. However, there is still a significant rise in entitlement spending in the years to come.
This Correction Seems Different from Prior Years
We believe the economy is on a different course than in the prior three years and do not think it will experience another persistent growth slowdown. Current fundamentals are supported by the global easing cycle, strengthening housing prices and declining commodity prices. In our view, changes in commodity prices should allow for lower inflation and a lift in real consumer income, as well as provide for further central bank easing.
The S&P 500 has been in the 1500 range for about six weeks, suggesting a lateral correction may have already unfolded. More price consolidation is certainly possible given the gains over the recent months. Regardless of choppy conditions, we believe the fundamental reasons behind the equity bull market are intact:
1. “Pedal to the metal” central banks promise to continue monetary easing
2. U.S. and global economic growth is moving irregularly higher (despite the second quarter slowdown)
3. Earnings growth remains acceptable
4. Some investors and reluctant bulls doubt the rally
5. Equity valuations are reasonable, with stock yields higher than 10-Year Treasuries
1 Source: Morningstar Direct, as of 4/19/13.
2 Source: Bloomberg, “Growth Probably Picked Up in First Quarter: U.S. Economy Preview,” 4/20/13, http://www.bloomberg.com/news/2013-04-21/
growth-probably-picked-up-in-first-quarter-u-s-economy-preview.html
3 Source: FactSet, “FactSet Earnings Insight,” 4/12/13, www.factset.com/websitefiles/…/earningsinsight/earningsinsight_4.12
4 Source: Bloomberg, “Obama Proposes $3.8 Trillion Budget to Revive Debt Talks,” 4/10/13, http://www.bloomberg.com/news/2013-04-10/obama-proposes-3-77-trillion-budget-to-revivedebt-talks.html.
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 floatadjusted 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, 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.
Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc
GPE-BDCOMM4-0413P
© Nuveen Asset Management
