This week we want to address important themes that underline our continued cautious optimism for a slowly improving global economy and signs of revenue and earnings growth momentum.
1. Weexpecta slow multi-year rise in U.S. Treasury yields after an abrupt start this spring. The yield increase was triggered by moderate improvement in underlying growth and news the Fed might begin to taper quantitative easing. The rise in 10-year Treasury yields of more than 100 basis points1 had a powerful ripple effect across markets, and raised fears that economic expansion could be at risk. We see upside risk for Treasuries despite current overextended technical conditions.
Stock market resiliency against the first big uptick in yields underscores a durable change in yields. The global economy shows signs of life, with rising economic and earnings expectations. Aside from short-term turbulence, we expect a gradual migration out of bonds and cash into equities.
2. Wecontinuetobelievethata sustained increase in inflation is unlikely in 2013 since wage growth remains weak. 2 In our view, there is too much slack in the U.S. economy for inflation to turn sustainably higher. Growth will need to accelerate first.
3. Lendingconditionsandrestrictionshaveeasedafterincreaseddemand,accordingtotheSeniorLoanOfficerSurvey. 3 Banks appear willing to compete as they become more confident and less fearful of a renewed downturn. Increased bank lending means increased business activity, which we believe will include spending on additional labor and capital expenditures.
4. Inourview,growth should increase in the third quarter. Our outlook is based on a small increase in consumption and business investment and a narrowing of the trade deficit. Although we forecast a drag from federal government spending during the quarter, the fiscal headwind is likely to fade. Also, state and local government spending should gradually pick up. We project an improvement to approximately 3% growth in 2014.
5. Unemploymentclaimsedgedupfortheweekending August 3. 4 In spite of the week’s advance, the 4-week moving average was the lowest since 2007.
6. Animproving fiscalsituationiscausingCongresstohardentheirpositionsonthebudget. We are gearing up for battles over 2014 spending, the future of sequestration, Affordable Care Act implementation and the debt ceiling. The debate is different this time because improving fiscal health has reinforced the views of both sides, and a compromise appears unlikely any time soon.
7. TheInternationalEnergyAgencyrecentlyreportedcontinuedgrowthinNorthAmericanoilsupply:“Thesupplyshockcreatedbya surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15 years.” 5 We agree. The U.S. has a once in a lifetime opportunity in energy that could have wide-ranging macro level benefits.
8. Chineseeconomicactivityshowssignsofstabilization,includinga stronger than expected rise in exports from China. 6 Slower activity momentum in China seems to be the consensus view. It would be a positive surprise if activity were to stabilize or pick up in the second half of the year.
9. TheU.S.stockmarketwilllikelynotfollowthepacesetearlierthis year. U.S. stocks are not necessarily vulnerable to a material pullback, but stock selection will be critical to producing gains.
10.Cyclicalstockscontinuetoperform better than defensive stocks. 7 Over the last three months, the health care, information technology, industrials and consumer discretionary sectors each had more than 60% of stocks outperform the market, while energy, telecommunications and utilities had less than 40% of stocks outperform. ▪
1 Source:Bloomberg, as of7/12/13. 2 Source: WSJ.com,“Low Pay Clouds Job Growth,” August 3, 2013, http://online.wsj.com/article/SB10001424127887324635904578643654030630378.html.3 Source: Federal Reserve Board,“The July 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices,” July 2013, http://www.federalreserve.gov/boarddocs/snloansurvey/201308/default.htm.4 Source: Department of Labor,“Unemployment Insurance Weekly Claims Report, “August 8, 2013, http://www.dol.gov/opa/media/press/eta/ui/current.htm.5 Source: Strategas Research Partners; International Energy Agency, “Medium-Term Oil Market Report,“ May 14, 2013. 6 Source: Market Watch, “China exports, imports rebound sharply in July,” August 8, 2013,http://www.marketwatch.com/story/china-exports-imports-rebound-sharply-in-july-2013-08-08?link=MW_pulse.7 Source: Strategas Research Partners; FactSet, as of 8/9/13.
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 tome a sure 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.
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