Positive Payroll Report Offsets Geopolitical Concerns

U.S. equities increased 1.1% last week after somewhat volatile trading due to heightened tension in Ukraine.1 Although the crisis dominated headlines, the market relegated the major geopolitical issue to the back burner. The broader macro narrative did not change, as concerns about dampened growth momentum continued to be pacified by the distortion from adverse weather. Several dynamics seem to support ongoing recovery, including better-than- expected February labor market data, some upbeat corporate and industry commentary and the outperformance of key cyclical market segments.

The Economy: Not Too Hot or Too Cold

The economy added 175,000 jobs in February and the prior two months were revised upward to add 25,000 new jobs.2 The unemployment rate moved up slightly to 6.7% from 6.6%, but this reflects labor force expansion in professional positions and wholesale trade.2 Presumably job growth would have been stronger under normal weather conditions, suggesting healthy underlying economic momentum. We have reached the mid-point of the business cycle, as indicated by lower volatility and a fading memory of the recession. Thus far, signs of overheating do not exist to entice major central banks to remove liquidity. We believe the best outcome for risk markets is for the world economy to continue to grow just above potential, neither too hot nor too cold. A much stronger economy could bring a faster end to easy money and pose questions about the amount of damage such a reversal would cause. A much softer economy would signal weakness in monetary policy and raise concerns about the downside. The result is that value dominates, forcing investors out of cash.

Weekly Top Themes

1. February Non-Manufacturing ISM® was well below expectations, falling to 51.6, the lowest reading since 2010.3 The disappointment sends a cautionary signal about momentum in the economy.

2. We foresee U.S. capital goods spending accelerating. Industrial capacity utilization is rising closer to historical inflection points for accelerating domestic capital goods purchases. We believe projected higher interest rates will stay below investment hurdle rates and not impact capital spending.

3. It appears that lower interest expense, control of labor costs and share buy- backs have impacted on per share profit growth. The bad news is it may be difficult to grow profit margins going forward. The good news is stronger top line growth could result in greater bottom line gains.

4. The European Central Bank (ECB) suggested the economic tide in the Eurozone may be turning fast enough to avoid additional easing. Mario Draghi indicated that the present policy could become more accommodative if the economy strengthens and inflation moves higher. We are not confident that inflation expectations will remain stable, and persistent ultra-low inflation could threaten rebalancing and debt sustainability.

5. The U.S. is relatively insulated from the Ukrainian turmoil. Trade between the United States and Ukraine is minimal, and Russia accounts for about 1% of overall U.S. trade. The peripheral impacts of geopolitical tensions are difficult to assess, however, and uncertainty affects equities.

The Big Picture

Stocks broke out to new highs after stumbling in late January. The conditions for sustained increases do not appear to be in place yet. Decisive global economic acceleration will be required to attract enough cash from the sidelines back into equities so that demand exceeds profit-taking. Global growth should gradually accelerate this year, led by the U.S. and developed economies. Recent soft U.S. economic data appear primarily weather-related and should normalize in the months ahead. Hiring plans and consumer confidence have hit new cyclical highs.

China is a forecasting challenge, but the best bet is stable growth. Europe is a swing factor for the global economy and is moving in a positive direction that should gradually strengthen. We do not expect the increase in the consumption tax in Japan to derail the recovery, in light of ongoing monetary policy support. G7 central banks and the Fed are strongly committed to reflation, which benefits risk assets. Investors should gradually rotate out of safe haven assets and into select risk assets, as confidence in the economic recovery solidifies. The process will be slow, and this is a tailwind for stocks and a headwind for bonds.

1 Source: Morningstar Direct, as of 3/7/14. 2 Source: Bureau of Labor Statistics, “The Employment Situation – February 2014,” March 7, 2014, http://www.bls.gov/news.release/empsit.nr0. htm. 3 Source: February 2014 Non-Manufacturing ISM® Report On Business,® March 5, 2014, http://www.ism.ws/ISMReport/NonMfgROB.cfm?navItemNumber=12943.

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. 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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