Global Economic Growth Should Gradually Begin to Improve

Equity markets reacted to both positive and negative forces last week, but the positive factors won out in the end. Corporate earnings sentiment was lackluster and investors continued to focus on the negative effects of falling oil prices. However, markets experienced a significant tailwind from a more aggressive-than-expected quantitative easing announcement from the European Central Bank (ECB). For the week, the S&P 500 Index climbed 1.6%, snapping a three week losing streak.1

There is More to Be Done, but ECB Easing Should Help

We expect the ECB’s new easing program will be moderately effective in helping to stave off deflation and boost growth. There is still more work to be done in Europe, however, and the dangers are far from over. We believe the eurozone needs significant structural reforms, which do not appear to be on the horizon. In any case, the new program should be a positive, and the weaker euro, the fall in oil prices and some healing in the banking sector should also help the eurozone. Looking ahead, we believe eurozone growth is more likely to surprise to the upside than the downside. We also believe the move should improve investor sentiment and put some much-needed upward pressure on global inflation expectations.

Weekly Top Themes

1. Economic weakness outside of the United States is helping U.S. growth. Slower growth in China is one factor putting downward pressure on oil prices and European deflation threats are keeping global interest rates depressed. Both of these trends are contributing to the consumer and business sectors of the U.S. economy.

2. U.S. earnings trends appear to be following the pattern of global divergence. At this point, fourth quarter estimates are that U.S.-oriented companies will see earnings growth of 11%, while globally-oriented companies will experience a drop of 1%.2

3. Although a number of factors are keeping interest rates low, we expect yields to rise in 2015. Our list of reasons includes a solid U.S. economy, a possible stabilization in oil prices, the likelihood of the Federal Reserve increasing rates and some healing in the eurozone.

4. In an unusual confluence, both the federal budget deficit and trade deficit are falling simultaneously.3 These trends are putting upward pressure on the dollar and should help support U.S. equities.

5. The creditworthiness of oil-producing companies and countries appears to be deteriorating. Credit spreads for both have been widening in recent weeks.1

6. Chinese economic growth slowed to 7.4% last year,4 and we believe weakness will persist. We expect Chinese corporate earnings, consumer spending and investment growth will all decline in 2015.

7. Relative equity and bond market yields suggest the outlook for stocks could be strong. For just the fourth time in the last 50 years, the dividend yield on the S&P 500 has moved above that of the 10-year Treasury. In the other three instances, equities advanced 25%, 35%, and 33% over the following twelve months.5

The Outlook for Equities Remains Solid

Financial markets have been experiencing a pocket of volatility, which has undermined investor confidence. We do expect that oil prices will stabilize and experience a moderate bounce from oversold levels, which should help calm the markets. Over the next twelve months, we have a constructive view toward risk assets. U.S. economic growth is improving, corporate earnings should be decent (outside of commodity-related sectors) and the fiscal drag is fading. The Fed is likely to raise rates, but will do so carefully and modestly. Outside of the U.S., reflationary support in Europe and Japan should help global growth. Investors should remain prepared for a bumpy ride in 2015, but by the end of the year, we expect equity prices will be higher than where they began.

1 Source: Morningstar Direct and Bloomberg, as of 1/23/15 2 Source: RBC Capital Markets 3 Source: U.S. Treasury Department and the Bureau of Economic Analysis 4 Source: China’s National Bureau of Statistics 5 Source: Bespoke Investment Group 

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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