Equities Benefit as U.S. Growth Solidifies

The dominant news story last week was President Obama’s announcement of new executive actions on immigration policy, but investors chose to look past any political risks and focused on the positives. Specifically, markets reacted well to signs that the European Central Bank would expand its monetary easing and to a surprise interest rate cut in China. The S&P 500 Index rose 1.2% last week, extending its winning streak to five weeks, and is now up 13% since the mid-October low.1 The materials and energy sectors led the way, while telecommunications was the only sector to finish the week in the red.1 

What’s Behind the Latest Climb in Equity Prices?

A confluence of positive forces have helped equity markets advance in recent weeks. Global growth remains solid with the U.S. and China holding steady. European growth remains a weak point but may be slightly better than feared. Central bankers around the world are keeping policy accommodative. The Federal Reserve has ended its asset purchases (but its balance sheet is not shrinking), while other central banks are still in easing mode. Corporations appear healthy and are engaging in shareholder-friendly deal activity as earnings have been beating expectations. And while geopolitics remain a risk, so far those risks appear well contained.

One caveat is that given the strong advance in prices, it is possible markets have been “borrowing” from what is often a seasonally strong end-of-year period. Should this be the case, we may see limited market upside for the rest of the year. 

Weekly Top Themes

1. The U.S. economy appears to be settling in at around a 3% annual growth rate. This would represent a stronger pace than what we have seen in recent years. Yet, we are conscious of some potential warning signs, including a rising U.S. dollar and widening credit spreads, which could be viewed as negative signals.

2. The immigration debate may be foreshadowing more gridlock for the coming years. In the near-term, the executive order from President Obama probably reduces the odds that a Republican Congress will grant the president trade promotion authority and reduces the likelihood of broad tax reform or a major budget deal. We do, however, believe the odds of a showdown resulting in a government shutdown remain low.

3. We expect this year’s holiday shopping season will be strong. The combination of improving employment, rising real income levels and lower gasoline prices should boost consumer spending.

4. Oil prices have been falling for a number of reasons, but we believe the most important has been the dramatic increase in recent years of U.S. crude oil production.

5. Wage inflation could begin to rise. Wages have been static for much of the current economic recovery, and the same factors driving spending levels higher should also promote modest wage growth.

U.S. Growth May Become Self-Sustaining

Taking a step back and assessing the state of the U.S. economy, it appears to us that the United States may be in a transition phase. In the aftermath of the credit crisis, the household sector was forced to aggressively deleverage, which dragged down consumer spending. At the same time, financial institutions were unable or unwilling to extend credit, which further pressured the economy. And the growth of federal government spending has been relatively low in recent years, which has dampened overall growth.

Today, while the U.S. economy does face further headwinds, the main sectors of the economy (households, corporations, financial institutions and government) are all in much better shape than they were several years ago, which should provide a better foundation for growth in the coming years. At this point, we would say the U.S. economy is becoming self-sustaining, and additional Fed stimulus may no longer be needed. Looking ahead, the United States may be in position to act as a growth engine for the rest of the global economy.

1 Source: Morningstar Direct, as of 11/21/14

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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