Emerging Market Issues Weigh on U.S. Equities

U.S. equities finished lower last week as the S&P 500 declined 2.6% and suffered the largest weekly pullback since June of 2012.1 U.S. stocks are down approximately 3.0% both year to date and from all-time highs. In 2014, lack of direction in the market has been a focus, and the waning influence of macroeconomic news caused a notable shift late last week.

Doubts Linger for Investors

Dampened growth momentum in China weighed on global risk assets and helped

to deepen the negative sentiment that already engulfed emerging markets. The peso devaluation in Argentina seemed to put contagion concerns back in play, exacerbating the sell-off.

Somewhat softer manufacturing and housing data appears to have put a dent in the U.S. growth momentum theme that was a big driver of the run-up in stocks in late 2013. Discussions continued about expectations for a pickup in capital expenditures. Washington, D.C., crept back into the headlines, and the debt ceiling is now expected to be a pressing near-term issue.

There is growing investor anxiety about the strength of global equity markets following their strong run in 2013, especially in light of a slightly lackluster economic backdrop. Many equity investors are questioning the efficacy of monetary policy, the level of profit margins and valuations, the threat of Fed tapering and geopolitical risks. Five years after a harrowing economic recession, equity investors still appear largely focused on risk.

Weekly Top Themes

1. Fourth quarter earnings season announcements are showing stronger signs. Thus far, 68% of companies reporting Q413 earnings beat consensus expectations. Approximately 25% of S&P 500 companies have reported earnings.2

2. Severe weather across much of the U.S. will likely impact economic data in

January. Once temperatures return to normal, a bounce back could unfold.

3. We expect the FOMC to cut its monthly asset purchases by another $10 billion next week. Despite concerns about emerging markets and a weak December payroll report, it is anticipated the Fed will reduce its purchases to $65 billion per month, and leave the interest rate forward guidance unchanged.

4. President Obama will deliver the State of the Union address on Tuesday. Income inequality is expected to be a major theme, though it is unlikely any proposed major policy initiatives will pass in Congress. Obama will probably also urge Congress to increase the minimum wage and pass extended unemployment insurance benefits. Due to a number of factors, not many areas outlined in the agenda will pass into law this year.

5. The correlation among stocks has been declining in 2014 and is now at the

lowest level in more than a year.3 As correlations fall, stock selection often

becomes more important.

The Big Picture

A correction in equities may be under way. A price correction would be natural

after the substantial increase in prices over the last few months. Potential areas of concern include the squeeze in China’s shadow banking system, increasing currency instability in several emerging market countries and a renewed spike in interbank borrowing rates in the Eurozone. Nevertheless, none of these issues are likely to significantly unsettle the global economy.

Bear markets have almost always coincided with economic recessions. Today, the developed world has barely recovered from the 2008 financial crisis, and it is not probable that another recession will emerge soon. If this conclusion is correct, the bull market should remain intact. Investors seem to be more upbeat about the world economy and prospects for stocks than they were 10 months ago, but signs of a bubble are not yet prevalent. A forward P/E ratio of 16 for the S&P 5004 is not viewed as extreme compared to a 10-year U.S. Treasury yield of 2.75%.5 We believe the sweet spot for equities is when the underlying economy remains weak but recovering, and monetary policy is stimulative. We have been in the sweet spot for some time, and it is likely to continue. Profit growth is about to accelerate. The Eurozone is ending recession and the U.S. economy remains below its potential. Also, inflation rates in G7 countries are below central bank targets. Overbought conditions and periodic worries about the impact of Fed tapering, particularly in emerging markets, is causing near-term choppiness. While the current turmoil may not be over, current conditions do not suggest a sustained decline in equity prices.

1 Source: Morningstar Direct, as of 1/24/14. 2 Source: FactSet, “Earnings Insight,” January 24, 2014. 3 Source: Morningstar Direct, as of 1/24/14. Representative indexes include the S&P 500 and MSCI EAFE. 4 Source: FactSet, as of 1/24/14. 5 Source: Bloomberg, as of 1/24/14.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. Euro STOXX 50 Index is Europe’s leading Blue-chip index for the Eurozone and covers 50 stocks from 12 Eurozone countries. FTSE 100 Index is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange. Deutsche Borse AG German Stock Index (DAX Index) is a total return index of 30 selected German blue chip stocks traded on the Frankfurt Stock Exchange. FTSE MIB Index is an index of the 40 most liquid and capitalized stocks listed on the Borsa Italiana. Nikkei 225 Index is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. Hong Kong Hang Seng Index is a free-float capitalization-weighted index of selection of companies from the Stock Exchange of Hong Kong. Shanghai Stock Exchange Composite is a capitalization-weighted index that tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. 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.


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. Noninvestment- 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.


© Nuveen Asset Management


Read more commentaries by Nuveen Asset Management