U.S. equities finished higher last week with the S&P 500 advancing nearly 1.0%.1 Positive sentiment has been supported by growing traction for the economic recovery, key economic data and corporate commentary. Although the upbeat dynamics were mentioned in the latest FOMC statement, policy normalization expectations have not changed. Another widely discussed tailwind was M&A headlines. Although tensions continue in Ukraine, geopolitical risks were mostly on the back burner.
Taking a Few Steps Forward
Non-farm payrolls rose 288,000 in April, ahead of the 220,000 consensus, and the strongest gain since January 2012.2 The three-month average of 238,000 is higher than the last few years. Average hourly earnings were unchanged, and the average weekly hours worked remained flat. The unemployment rate fell to 6.3%, the lowest since September 2008.2
First quarter earnings season metrics continue to improve. Nearly 75% of S&P 500 companies have reported earnings and 74% have beaten consensus earnings per share expectations.3 Importantly, companies commented on upbeat conditions as we emerge from the first quarter.
Challenges for market participants have included tight trading ranges and dramatic declines in volatility in bonds, stocks and commodities. Low volatility is generally good for markets and the economy because it boosts confidence and investment.
Since volatility rarely stays this low for long, we anticipate it should increase, but that remains to be seen.
Weekly Top Themes
1.First quarter real GDP edged up 0.1%, approximately 1% weaker than expected.4 Real consumption was stronger than expected, but all other main components were weaker. High frequency data point to the U.S. economy continuing to re-accelerate, and we would not be surprised if real GDP moves above 4% for the second quarter.
2.The FOMC reduced the monthly pace of asset purchases by another $10 billion to $45 billion.5 The move was universally expected. A statement indicated that: “growth in economic activity has picked up recently after having slowed sharply during the winter in part because of adverse weather conditions.”
3.Events in Ukraine continue to unfold and escalation has been building slowly for weeks. Attention from investors appears to be relatively complacent.
4.The direction of leading economic indicators is typically the best gauge of market returns during summer months. According to Cornerstone Macro, historically in years the Purchasing Managers Index (PMI™) has increased, average performance for the S&P 500 has been almost 6%. When the PMI has declined, returns have been -2%. April PMI data increased 1.2%.6
5.Is the bull market running out of steam after five years? Some analysts have suggested the recent rotation from secular growth stocks to cyclical value may be a sign that price/earnings ratios are stretched and equities are due for a pullback. Our work suggests rallies do not end when markets are tired, but rather when recessions begin, and we do not see this on the horizon.
The Big Picture
The recent sideways trend of global equities should gradually give way to a renewed uptrend as the global economic recovery gains traction. While equities are still digesting last year’s strong gains, an imminent upturn in corporate earnings implies higher stock prices on a 6- to 12- month horizon, with risks tilted to the upside. A strengthening economic recovery also signals higher G7 government bond yields, especially as the markets begin factoring in the start of Fed rate hikes sometime next year. Investors remain cautious about the outlook but should gain greater comfort
as global growth shifts onto a stronger trajectory. This should eventually result in a steady flow out of cash and bonds into stocks. Geopolitical risks aside, the path of least resistance for equities and bond yields is shifting upward.
2014 Performance Year to Date
|
Returns |
||
|
Weekly |
YTD |
|
|
S&P500 |
1.0% |
2.4% |
|
EuroSTOXX50 |
1.6% |
3.9% |
|
FTSE100(UK) |
2.6% |
4.4% |
|
DAX(Germany) |
1.8% |
0.5% |
|
FTSEMIB(Italy) |
1.8% |
16.8% |
|
Nikkei225(Japan) |
0.0% |
-8.2% |
|
HangSeng(HongKong) |
0.2% |
-4.0% |
|
ShanghaiStockExchangeComposite(China) |
-0.6% |
-7.4% |
|
MSCIWorldExU.S. |
1.4% |
2.9% |
|
MSCIEmergingMarkets |
1.1% |
0.8% |
Source: Morningstar Direct and Bloomberg, as of 5/2/14. All index returns are shown in U.S. dollars. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. Index returns include reinvestment of income and do not reflect investment advisory and other fees that would reduce performance in an actual client account. All indices are unmanaged and unavailable for direct investment.
1 Source: Morningstar Direct, as of 5/2/14. 2 Source: Bureau of Labor Statistics, “The Employment Situation – April 2014,” May 2, 2014, http://www.bls.gov/news.release/empsit.nr0.htm. 3 Source: FactSet, “Earnings Insight,” May 2, 2014. http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_5.2.14. 4 Source: U.S. Department of Commerce Bureau of Economic Analysis, “National Income and Product Accounts Gross Domestic Product, First Quarter (advance estimate); April 30, 2014, http://www.bea.gov/newsreleases/national/gdp/2014/gdp1q14_adv.htm. 5 Source:Federal Reserve, “Federal Reserve Issues FOMC Statement,” April 30, 2014, http://www.federalreserve.gov/newsevents/default.htm. 6 Source: April 2014 Manufacturing ISM Report On Business,® May 1, 2014, http://www.ism.ws/ismreport/mfgrob.cfm.
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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