An Improving Economy Justifies a Pro-Growth Investment Stance
U.S. equities advanced again last week with the S&P 500 Index climbing 0.4%, extending its winning streak to seven weeks.1 Investors responded well to improving economic data and focused on the positive aspects of declining oil prices. In China, equities moved sharply higher and notched their best weekly performance in seven years1 as investors speculated that Chinese officials were on the verge on enacting additional policy support.
Global Growth Should Accelerate in 2015
At the beginning of 2014, most observers (us included) expected that equity markets would have a good year but rising rates would challenge areas of the bond market. As we approach the end of the year, it appears we were correct about equities performing well, but the bond markets have also experienced good results (through the end of last week, the Barclay’s U.S. Aggregate Index was up 5.3% for the year).1 The global economy has underperformed expectations so far this year, which has kept bond yields low.
We expect that 2014 global gross domestic product will have grown by around 2.5% or 2.6%. Next year, we believe less fiscal tightening, increased monetary stimulus and improving confidence should push global growth over 3%.
Weekly Top Themes
1. Significant improvements in the labor market will pressure the Federal Reserve to begin increasing rates. November’s payroll report showed that 321,000 new jobs were created last month, significantly ahead of expectations.2 Given the pace of growth, it is increasingly difficult to justify the current low level of the fed funds rate. We’re keeping a close eye on December’s Fed policy meeting to see if the central bank begins signaling the timing of rate increases.
2. We believe Treasury yields will begin rising over the coming months. The significant fall in Treasury yields was perhaps the biggest market surprise in 2014, but we believe the beginning of Fed rate increases, improving global growth and a bottoming of inflation should act to push yields higher.
3. Increasing production levels should keep downward pressure on oil prices. Even if OPEC does decide to begin limiting supplies, increased production from the United States is likely to continue. The International Energy Agency estimates that U.S. production could exceed that of Saudi Arabia by the end of next year.3
Equities Look Compelling, but Commodities May Struggle
It has been a wild ride for investors in 2014, with bond yields declining and equity markets reaching record highs. U.S. equity markets appear on track for another year of double-digit gains despite long-held and widespread concerns that stocks were overdue for a significant correction. Non-U.S. equities have lagged, largely as a result of weaker economic growth and deflation fears.
Despite uneven global growth and persistent deflation concerns, we do not expect any major markets to enter depression territory despite that fact that government bond yields in several European countries and in Japan are low enough that they are signaling such an environment. In fact, as we stated earlier, we believe global growth should accelerate and should improve enough to allow equity markets to grind higher.
Healthy earnings growth has been the primary driver of equity returns this year, and we expect that trend will continue into 2015, with cyclical areas outperforming defensive sectors (for both the U.S. and global markets). The main threats to this outlook would be a recession, a deflationary environment or a drop in confidence. All seem unlikely to us, suggesting that the path of least resistance for stocks would be for prices to move higher. We do not expect equity gains to match the pace they experienced over the past several years, but equities still look attractive relative to other asset classes.
We have a less sanguine view toward energy and commodity prices. The recent pullback has been extremely sharp and quick, which suggests that some areas of the market may be oversold and due for a near-term bounce. Over the longer-term, however, we think the “cheapness” of energy prices is justified due to poor fundamentals, and we expect supply and demand dynamics to keep downward pressure on energy and other commodities.
1 Source: Morningstar Direct and Bloomberg, as of 12/5/14 2 Source: U.S. Bureau of Labor Statistics 3 Source: International Energy Agency
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. The Barclays U.S. Aggregate Index covers the U.S. invest-ment grade fixed rate bond market. 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 Ger-man 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. ©2014 Nuveen Investments, Inc. All rights reserved.
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