Emerging Market Turmoil Creates January Decline

by Bob Doll of Nuveen Asset Management, 2/5/14

U.S.equitiesfinishedlowerlastweek,astheS&P500endedJanuarywiththefirstmonthlylosssinceAugust2013andthelargestmonthlydeclinesinceMay 2012.1 A global retreat from risk has been sparked by unrest around the world, sell-offs in emerging markets led by a 20% decline in the Argentine peso,weakerthanexpectedeconomicreportsfromChina,U.S.economicgrowthconcernsinlightoffrigidtemperaturesandanxietyoverFedtapering.

Near-term Fluctuations Do Not Imply Sustained Decline

Webelieveeventsinemergingmarkets were themainsourceofdamagetoglobalriskmarkets.InvestorshavebecomeunnervedbypoliticalturmoilinThailandand Turkey,suddendevaluationinArgentinaandconcernsaboutChina’songoing effortstoreducethegrowthofleverageinthefinancialsystem.Sofar,thereisnoevidenceofnegativeeffectsfromemergingmarketdisturbancesmovingintoU.S.creditmarketsorfinancialconditions.Anongoingequitymarketsell-offandTreasury rallywilllikelyeventuallyput pressureonrisk spreadsandtightenfinancialconditions.However,wedonotthinkthis pressurewillbe significantenoughtoslowtherecoveryorcausetheFedto reconsider tapering.

Over the last 86 years, the S&P 500 has declined only 31 times in January, according to J.P. Morgan. In 14 of these 31 periods, the S&P 500 continued to decline during the balance of the year, so historically a decrease in January does not necessarily translate into deterioration over the remaining 11 months. In fact, the opposite is more likely.

WeeklyTopThemes

  1. RealGDPincreased3.2%inthefourthquarterof2013,following4.1%growth in the third quarter.2Inventories,netexports,consumptionandbusinessinvestment were strong.Weaknessexistedinresidentialinvestmentandgovern-mentspending.
  2. Homepricesappreciated0.9%overthepriormonthintherecentCase-Shillerreport.3Pricesincreased 13.7% year-over-year forthe20-citycomposite,seasonally-adjusted.Aftercontinuedsolidhouseprice appreciation,weexpectthepacetoslow.
  3. Confidence increased as the Conference Board Consumer Confidence Index® rose to 80.7 in January.4ThisrepresentsthehighestlevelsinceAugust2013andisclosetoa post-recession high.
  4. Asexpected,the Federal OpenMarketCommittee(FOMC)willtaperQEbyanadditional$10billionin February,bringingassetpurchasesto$65billionpermonth.5Emergingmarket turmoilwasnotreferenced,which underscoresthisisnot perceived asa threat to the U.S. outlook.
  5. Fourthquarterearningsreportsarecurrentlystrongerthanaverage. Ofthe50%ofS&PcompaniesthathavereportedQ413earnings,74%beat consensusEPS expectationsand67%reportedsalesabove consensusexpectations.6

TheBigPicture

Theweaknessinequitypricesin2014reflectsinvestornervousnessafterhugegainslastyear,andtheemergingmarketcurrencycrisismayhavebeena convenient excuse to sell equities. There are mounting concerns about growth and corporate earnings, with fears of a Chinese hard landing lurking in the background. Financial signals do not indicate that the current shock will mushroom beyond a bull market correction. Any potential economic fallout would take time to emerge, and since major developed world economies have been strengthening, they should be able to weather this period. Policymakers are far more alert to deflationary risks than prior to 2012, and we do not expect economic risk-taking by the major central banks.

Weanticipatethecorrectiontoprovetemporaryintermsoftheuptrendinperformanceofstocksversusbonds,andinvestorsmaywanttoevaluategraduallyaddingtoequitypositions.Wehavetheoppositeviewforthemaingovernmentbondmarkets.Althoughemergingmarketequitiesarenowevencheaper,theoffsetisthatinvestorsentimenthasbeendamagedandwilltaketimeto recover.Considerableevidenceofimprovingglobal trade andstable currencies willbeneeded to attractbuyers.

1 Source:MorningstarDirect,asof1/31/14.2 Source: U.S.DepartmentofCommerceBureauofEconomicAnalysis,“NationalIncomeand ProductAccountsGrossDomestic Product,4th quarter andannual2013(advanceestimate); January 30, 2014,http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm.3 Source:S&PDow Jones Indices, “Winter Shows No Signs of Cooling inHomePrices Accordingtothe S&P/Case-Shiller Home Price Indices,” January 28, 2014,http://www.us.spindices.com4 Source:TheConference Board, “The Conference Board Consumer Confidence Index® Increases Again,” January 28, 2014,http://www.conference-board.org/data/consumerconfidence.cfm5 Source: BoardofGovernorsoftheFederalReserve System,“FederalReserve IssuesFOMCStatement,”January29,2014,http://www.federalreserve.gov/newsevents/press/monetary/20140129a.htm6 Source:FactSet, “EarningsInsight,”January31, 2014.

TheS&P500Indexisa capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy.EuroSTOXX50IndexisEurope’sleadingBlue-chipindexforthe Eurozone and covers 50 stocks from 12 Eurozone countries.FTSE100Indexisa capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock

Exchange.DeutscheBorseAG German Stock Index (DAX Index) isa total return index of 30 selected German blue chip stocks traded on the Frankfurt Stock Exchange. FTSE MIB Index is an index ofthe40 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 StockExchange.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 acapitalization-weighted indexthattracksthedailypriceperformanceofallA-sharesandB-shareslistedontheShanghaiStockExchange.TheMSCI World Index ex-U.S. isa free float-adjusted marketcapitalizationweightedindexthatisdesignedtomeasuretheequitymarketperformanceofdevelopedmarketsminustheUnitedStates.TheMSCIEmergingMarketsIndexisa free float-adjustedmarketcapitalizationindexthatisdesignedtomeasureequity marketperformanceofemergingmarkets.

RISKSANDOTHERIMPORTANTCONSIDERATIONS

Theviewsandopinionsexpressedareforinformationalandeducational purposesonlyasofthedateofwritingandmaychangeatanytimebasedonmarketorotherconditionsandmaynotcometopass.Thismaterialisnotintendedtoberelieduponasinvestmentadviceorrecommendations,doesnotconstitutea solicitation to buy or sell securities and shouldnotbeconsideredspecificlegal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of anyspecificperson.Allinvestmentscarrya certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investmentsaresubjecttomarketriskortheriskthatstockswilldeclineinresponsetosuchfactorsasadversecompanynewsorindustrydevelopmentsora general economic decline. Debt orfixedincomesecuritiesaresubjecttomarketrisk,creditrisk,interestraterisk,callrisk,taxrisk,politicalandeconomicrisk,andincomerisk.Asinterestratesrise,bondpricesfall.Non-investment-gradebondsinvolveheightenedcreditrisk,liquidityrisk,andpotentialfordefault.Foreigninvestinginvolvesadditionalrisks,includingcurrencyfluctuation,politicalandeconomicinstability,lackofliquidityanddifferinglegalandaccountingstandards.Theserisksaremagnifiedinemergingmarkets.Pastperformanceisnoguaranteeoffutureresults.

NuveenAssetManagement,LLCisa registered investment adviser and an affiliate of Nuveen Investments, Inc.

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