Equity Markets Remain Mixed as Fundamentals Slowly Improve
U.S. equities finished mixed last week as the Dow Jones Industrial Average was the only major index to end in positive territory.1 The overall macro narrative appears favorable despite the lack of market direction. Scrutiny of beaten-down momentum stocks resurfaced, although broader market spillover remained muted. Treasury market strength was another lingering theme for equity investors, though it did not seem to dampen sentiment for the economic recovery. Fed Chair Yellen was a bit more dovish than expected regarding monetary policy, while European Central Bank President Mario Draghi hinted at further policy action in June.
Economy Appears to Be Moving in the Right Direction As discussed in mid-April, a Cornerstone Macro report aligns with our current thinking on why the U.S. economy is likely to gather momentum.2
| Significantlylessfiscaldragfromthefederalgovernmentandsignsofincreasingstateandlocalspending | ImprovingtradefromstrongU.S.manufacturingandexporttrends |
| Lowinflation,helpingbothbusinessandconsumers | TheEurozone recovery isonincreasingly better footing |
| Domestic corporate profits rising,increasing the odds thatboth employmentand capeximprove | CorporatebondyieldsintheU.S.continuetodecline |
| AlaggedimpactofFedstimulusisliftingthemoneysupplyandbankloans | Housepricesarerising,helpingtoboostconsumerconfidenceandspending |
| Consumerdeleveragingheadwindsandsevereweatherarebehindus | Theimpactsofboththemanufacturingandenergyrenaissancesarebroadening |
Weekly Top Themes
1.First quarter earnings season marked the third consecutive quarter of improved revenue and earnings per share growth.3
2.Several reasons support our view that second quarter GDP growth will exceed 4%: decline in initial unemployment claims, increases in service sector activity, higher weekly mortgage applications and a solid rise in home prices.
3.Private-sector payroll employment reached a record high in March.4 Total payroll employment is only 113,000 below its 2008 peak and could reach an all- time high in May (reported in early June).
4.Corporate inversions are taking place in the United States since corporate tax rates are the highest in the industrialized world. As the only industrialized
country to double tax foreign sources of profiU.S. companies may re-incorporate businesses outside the country to reduce the tax burden.
5.Recently, the number of stocks making new highs has not expanded, and the number of stocks above critical moving averages has declined. A market without momentum will likely not make much forward progress.
The Big Picture
Concerns about deflation, geopolitical tensions and the potential for negative economic contagion have caused recent churning in the financial markets. However, the policy backdrop in major developed economies and gradually improving underlying trend in global growth continue to offset the noise and periodic anxiety. A debate exists between government bonds and U.S. equities. U.S. Treasury yields have edged lower in the past month as equity prices have been firm, and the economy has improved and outpaced expectations. Interest rates are anchored below nominal GDP growth and major central banks have committed to lag the economic cycle. Our investment stance remains pro-growth. Lower government bond yields may provide an impetus to reduce bond allocations and increase presence in risk assets, including equities.
2014 Performance Year to Date
|
Returns |
||
|
Weekly |
YTD |
|
|
DJIA |
0.6% |
0.9% |
|
S&P500 |
-0.1% |
2.4% |
|
EuroSTOXX50 |
-0.1% |
3.8% |
|
FTSE100(UK) |
-0.1% |
4.3% |
|
DAX(Germany) |
-0.1% |
0.0% |
|
FTSEMIB(Italy) |
-2.6% |
13.8% |
|
Nikkei225(Japan) |
-1.3% |
-9.3% |
|
HangSeng(HongKong) |
-1.4% |
-5.3% |
|
ShanghaiStockExchangeComposite(China) |
-0.2% |
-7.6% |
|
MSCIWorldExU.S. |
-0.4% |
2.5% |
|
MSCIEmergingMarkets |
0.4% |
1.2% |
Source: Morningstar Direct and Bloomberg, as of 5/9/14. 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 reinvest- ment of income and do not refl 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: Bloomberg, as of 5/9/14. 2 Source: Cornerstone Macro, “11 Reasons We Think the U.S. Recovery is Gathering Momentum.” April 10, 2014. Used with permission. 3 Source: FactSet, “Earn- ings Insight,” May 9, 2014. http://www.factset.com/websitefiarningsinsight/earningsinsight_5.9.14. 4 Source: Bureau of Labor Statistics, “The Employment Situation – April 2014,” May 2, 2014, http://www.bls.gov/news.release/empsit.nr0.htm.
The Dow Jones Industrial Average is a price-weighted average of 30 signifistocks traded on the New York Stock Exchange and the Nasdaq. 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. 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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