A Relatively Dovish Fed Statement Helps Equities Recover Ground
Last week featured some disappointing economic data and further downward revisions of corporate earnings estimates, but investors focused heavily on last week’s Federal Reserve policy meeting. The Fed’s statement was more dovish than expected, and investors interpreted the comments as an indication that rate increases would not happen as soon as some anticipated. As a result, the U.S. dollar lost some ground and equities rallied, with the S&P 500 Index snapping a three-week losing streak to gain 2.7%.1 Health care was the bestperforming sector, while materials was the only area of the market to end the week in the red.1
We Still Expect Rate Increases Will Begin in 2015
The main headline from the Fed’s statement was the removal of the word “patient” when discussing the path toward rate increases, but almost every other aspect signaled no immediate hurry to act. The Fed indicated that it still saw some slack in the labor market and noted that inflationary pressures remain absent.
Our view is the Fed is reacting to the strong upward trend of the dollar, muted wage increases and signs that economic growth has become sluggish. Federal Reserve officials understandably want to retain some flexibility, but we believe rate increases at some point over the coming months are almost inevitable. Our best guess would be that the Fed will enact its first rate increase at its September policy meeting, rather than in June as many had previously anticipated.
Weekly Top Themes
1. The manufacturing sector has been struggling. Industrial production increased at a disappointing 0.1% rate in February, while manufacturing output fell 0.2%.2 Some of the weakness can be attributed to temporary factors such as the harsh winter weather and the West Coast port strike, but we also believe that the strength in the dollar has been hurting manufacturing.
2. Lower oil prices and the stronger dollar bring both positives and negatives. Specifically, we believe that while these trends are hurting U.S. corporate earnings results and expectations, they are also net positives for the U.S. economy.
3. We expect several market trends to continue. The months-long themes of falling commodity prices and a rising U.S. dollar may be taking a break, but those trends are probably not over. At the same time, we expect equities will outperform bonds in the coming months and European equity strength will persist in the near-term.
The Global Economy Should Gradually Accelerate, Providing a Tailwind for Stock Prices
It appears the world economy may be at the beginning of a gradual leadership transition from the U.S. to non-U.S. markets. With the Fed likely to begin increasing rates later this year, the reflation banner is being passed from the U.S. to the euro area and Japan. Many emerging market economies should also benefit from interest rate cuts, but it will take some time before economic growth accelerates.
Reflationary trends have been a critical driver of equity market performance in recent years and we do not believe that the era of reflation is over. Many central banks are still in the early stages of easing. In the U.S., Fed policy remains highly accommodative and even when the Fed finally does begin raising rates, it will be starting from such a low level that monetary policy should remain supportive for equities for some time.
Given this backdrop, we continue to believe that equities look attractive and expect they should benefit from a gradual acceleration in global growth. With commodity prices likely to remain soft, we tend to prefer commodity users rather than producers, and have a bias toward the non-commodity cyclical sectors. Over the coming months, we expect upward pressure on the value of the dollar to continue, but do not anticipate the dollar’s rise will continue at the same breakneck pace we have seen in recent months. At the same time, we expect to see a gradual rise in global bond yields as the Fed approaches the start of interest rate increases.
1 Source: Morningstar Direct, as of 3/20/15 2 Source: Federal Reserve
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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