Last week U.S. equities struggled for direction as the S&P 500 declined 0.4%.1 Small cap stocks were hit harder, and macro and geopolitical issues seemed to be on the back burner. Overall, emerging markets rallied, value and contrarian plays outperformed and Japanese stocks bounced. Observers debated the implications for broader market sentiment given the sell-off in momentum- driven companies. The big theme may be the extent to which weather is helping to de-risk the sluggish corporate profit backdrop. Many companies have reduced guidance for first quarter due to weather headwinds.
Waiting for Growth Forecasts to Ignite
Growth should pick up in the weeks to come. Data surprises appear to have bottomed, weather normalization should boost growth, financial conditions remain supportive and leading indicators for capital spending have improved. As a result, we expect economic activity will bounce back and provide 3% growth for the rest of 2014.
Weekly Top Themes
1.Initial unemployment claims have fallen in three of the last four weeks.2 Also, the four-week moving average is close to a new cycle low.
2.Consumer confidence jumped to the highest level since January 2008 and was well above expectations.3 C onfidence has held at solid levels over the last few months, in contrast to economic data. We think this supports a post-winter rebound in activity and consumer spending, as the recent slowdown in GDP growth was likely affected by a temporary weather shock.
3.Over the long term, earnings matter for the direction of the stock market.U.S. equity prices have risen sharply over the last two and a half years while earnings have lagged.4 After the recent re-rating, earnings progress is needed.
4.Normalization of U.S. monetary policy has helped create and should help sustain higher volatility in financial markets, including U.S. equities. The Federal Reserve (Fed) has retreated from forward guidance, and once rate hikes begin, the pace could potentially be faster than expected. If the labor market improves and the Fed gains confidence in its forecast, the FOMC will shift from how long to keep interest rates at zero to when to raise rates
5.In the near term, the equity market continues to act tired. We see signs that include advancing versus declining issues, small stocks underperforming, the inability to hold early morning gains, new high and low lists and the advance/ decline line.
The Big Picture
As the first quarter comes to a close, the promised growth surge has not arrived. The obvious trades coming into 2014 — short duration and long equities — have not proved fruitful. Tensions between Russia and Ukraine may continue to hold back stocks and support government bonds in the near term. Market risks present in any bull market may need to be evaluated, such as taking profits and waiting until conditions become less overbought and valuations improve, missing the rally. Periodic corrections occur because bad news causes most investors to freeze and miss the opportunity to buy on weakness. The later stages of bull markets tend to be grinding and lack a new catalyst. In contrast, during the early stages, monetary conditions ease and/or economic prospects suddenly brighten, providing a trigger to buy. Later stages also involve an extrapolation of the business and earnings cycle, rather than a powerful spark that ignites sentiment. Patience is warranted in the middle of a trend, and we remain pro-growth in our investment stance. Investor confidence should improve when economic activity increases, which should occur in developed countries in the near term and could spread to parts of emerging markets later in the year.
We remain constructive because we believe the U.S. economy is set to improve, interest rates will stay unusually low, fiscal restraint is firmly in place, energy independence is on the horizon, and we do not expect surprises from Washington, D.C. We understand that a stock market correction is long overdue, and an external shock could provide one. But we are still in the early innings of a U.S. economic liftoff, accompanied by positive macro themes that seem to have sufficient time to run.
1 1 Source: Morningstar Direct, as of 3/28/14. 2 Source: U.S. Department of Labor, “Unemployment Insurance Weekly Claims Report,” March 27, 2014, http://www.dol.gov/opa/media/press/eta/ui/current.htm. 3 Source: The Conference Board, “The Conference Board Consumer Confidence Index® Rebounds in March,” March 25, 2014, http://www.conference-board.org/data/consumerconfidence. cfm 4 Source: FactSet, as of 3/28/14. U.S. equities represented by S&P 500 Index.
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.
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. 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.
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