The macro backdrop last week was positive for the markets. As expected, the European Central Bank (ECB) cut interest rates, highlighting the favorable global monetary policy backdrop. Closer to home, solid vehicle sales and a good May labor market report gave investors additional reasons to bid up stock prices. The S&P 500 Index advanced 1.4%,1 marking a third straight week of gains above 1% — the longest such streak since last September.1 A closer look at the rally also shows that investors were in a “risk-on” mode, with small cap stocks and cyclical areas of the market outperforming.1 Looking ahead, we believe the combination of an improving world economy, low levels of volatility and easy global monetary policy should continue to provide support for equities.
Ten Reasons to Stick with Equities
The bull market has now gone 31 months without a 10% correction.1 At some point, we’re bound to see one (perhaps caused by an inflation scare), but for now, we would argue that stocks still have room to move higher. On this point, Strategas Research Partners2 has recently been discussing reasons to remain constructive toward equities, and we think it is worth sharing some of them:
Weekly Top Themes
1. Payrolls rose slightly more than expected, advancing 217,000 in May. At the same time, the unemployment rate held steady at 6.3% and average hourly earnings rose.3 The data suggest the economy is growing at a moderate pace.
2. The move by the ECB met market expectations. The ECB is clearly concerned about the growing threat of deflation, and we believe Europe is in need of some serious growth-oriented structural reforms.
3. The Fed’s June beige book reported a moderate expansion of economic activity, with almost all districts reporting stronger consumer spending.4
4. The trade deficit widened, adding modest downside risk to second quarter GDP growth.5
5. With consumer price inflation hitting 2%, concerns may start brewing about whether we are in the early stages of an inflation cycle.6
The Big Picture: Invest for a Pro-Growth World
The current bull market has been progressing for five years, but we do believe it should persist. We also expect economic growth to continue to improve, bond yields to rise from currently low levels and the U.S. dollar to advance against most currencies in the coming months.
Altogether, such an environment argues for what we call a moderately pro-growth investment stance. Specifically, we think that an improving economy should lead to better corporate earnings, which should translate into higher equity prices over the coming six to twelve months. As such, from an asset allocation perspective, we favor equities over bonds. We also expect to see cyclical market sectors outperform defensive ones. In anticipation of rising rates, we also believe that fixed income credit sectors tend to look more attractive than developed market government bonds.
1 Source: Morningstar Direct, as of 6/6/14.
2 Source: Nuveen Asset Management and Strategas Research Partners. Used with Permission.
3 Source: Bureau of Labor Statistics http://www.bls.gov/ news.release/empsit.nr0.htm.
4 Source: U.S. Federal Reserve http://www.federalreserve.gov/monetarypolicy/beigebook/beigebook201406.htm.
5 Source: Bureau of Economic Analysis http://bea. gov/newsreleases/international/trade/tradnewsrelease.htm.
6 Source: Bureau of Labor Statistics. http://www.bls.gov/news.release/cpi.nr0.htm.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. - See more at: http://www.nuveen.com/Commentary/BobDoll/WeeklyCommentary.aspx#sthash.TH3mPQZs.dpuf
