U.S. equities finished higher for a second straight week, with the S&P 500 Index gaining 2.1% as it ended the week at a record high.1 Investors largely shrugged off disappointing retail sales figures and chose to focus on the positives. Sentiment improved as a result of signs of a potential debt restructuring deal between Greece and the European Union as well as from a cease fire agreement in Eastern Ukraine. An additional climb in oil prices also helped boost equity markets. The technology sector was the best-performing area of the market last week, while utilities was the only sector that posted negative returns.1
Weekly Top Themes
1. We expect the consumer sector to exhibit strength in 2015. Employment gains in manufacturing, construction and in state and local governments appear to be on the horizon. Also, low interest rates and lower energy prices should prompt consumers to pick up spending as the year progresses. We anticipate disposable personal income levels will accelerate in the coming months.
2. For now, weak retail sales figures show that consumers are still exercising caution. January sales were down a disappointing 0.8% last month,2 although that figure may be skewed by a drop in spending at gas stations.
3. It appears that a Greek debt restructuring deal may be on the horizon. Nothing has been settled yet, but the Greek government and the European Union do appear to be approaching a compromise. Any such deal is likely going to require Greece to give up on its demands for a significant reduction in its debt obligations in exchange for the country being allowed to run a smaller primary budget surplus.
4. Non-U.S. growth continues to struggle. We have been seeing some signs of improvement in European growth, but Chinese economic growth seems to be weakening, Russian GDP growth is plummeting and Brazil may be moving into a recession.
5. It is possible progress could be made in trade legislation. When it comes to most issues, Washington appears to be mired in gridlock, but if there is one area where we may see some legislative progress, we would expect it to be trade policy.
We Expect Equity Prices and Bond Yields to Climb
Since the end of January, global financial markets have started to stabilize. Although deflation worries and geopolitical risks are likely to keep volatility relatively elevated, we think there are some important factors that should provide ongoing support for equity markets. In particular, U.S. economic acceleration should act as a tailwind for the rest of the world, and global monetary policy remains extremely supportive.
The U.S. economic picture has brightened over the past year, and it seems obvious to us that the United States no longer needs the extraordinarily low interest rates the Fed adopted as part of its emergency measures during the height of the financial crisis. Regarding global monetary policy, several central banks are still in the early stages on their easing programs, which should help keep global financial liquidity ample when the Federal Reserve does begin interest rate increases. Financial market volatility is likely to increase when those rate hikes do begin, but we do not think this event will be enough to derail the bull market.
The months-long collapse in oil prices last year and into early 2015 resulted in a spike in deflation fears, which, in turn, caused bond yields to fall. Our view is that lower oil prices are, in the long term, a reflationary rather than a deflationary force. As a result, we expect yields will rebound in the coming months, which is one reason we believe equity markets look more attractive than bond markets. Thanks to an improving economy and still-solid earnings, the prospects for U.S. equities appear solid to us.
Outside of the United States, the outlook for equities is a bit more mixed, but global equity valuations still appear attractive and recent market strength in some troubled regions such as Europe may be a positive sign for the future. As global economic growth improves over the coming year, we believe both global equity prices and global bond yields should rise.
1 Source: Morningstar Direct, as of 2/13/15 2 Source: Department of Commerce
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.
©2015 Nuveen Investments, Inc. All rights reserved.
GPE-BDCOMM3-0215P 6232-INV-W02/16
