Global Economic Risks Remain but Appear to Be Diminishing
Investors reacted to a range of data and news last week that included a further digesting of the relatively weak March jobs data, ongoing merger and acquisition news, signs of weakening corporate earnings and further evidence of upward pressure on wages. Amid all of the crosscurrents, U.S. equities finished higher, with the S&P 500 Index gaining 1.7%.1 Most international markets advanced as well, while Treasury yields and the U.S. dollar rose.1 Industrials, health care and energy stocks led the way while telecommunications, utilities and financials lagged.
Weekly Top Themes
1. Corporate earnings may decline in 2015. The combination of the 50% fall in the price of oil and the 20% rise in the value of the U.S. dollar since last June is depressing corporate earnings.1 We estimate that were it not for these factors, earnings per share growth for the S&P 500 would be somewhere around 8% to 10% this year.
2. The oil and dollar dynamic may start to fade a bit. We believe oil prices may have reached or be near the end of the worst of their bearish phase, but we also think it will take some time for prices to advance given the current supply/demand environment. The bull market in the dollar is likely to continue, but at a much less frenetic pace.
3. Wages are starting to increase. The March payroll data showed that year-over-year average hourly earnings were up 2.1% and unemployment remained at 5.5%.2 These figures provide evidence the labor market is tightening as companies are stepping up efforts to retain workers.
4. A Federal Reserve rate hike cycle is likely to kick off later this year, but we don’t expect dramatic increases. The Fed is attuned to financial markets, and investors are closely watching the Fed as they wonder when the liftoff will begin and how high the fed funds rate will go. Our view is that September 2015 seems the most likely timeframe, and we believe an increase in the fed funds rate to between 1.5% and 2.0% would be neutral given prevailing economic conditions.
5. Equity market technicals appear supportive of further price gains. Although the market as a whole has moved sideways for much of this year, technical conditions are healthy. According to data from Strategas Research, 70% of companies within the S&P 500 are currently in an uptrend.3 That compares to only 43% of companies at the market peak of October 2007 and only 27% at the March 2000 high.3
Tailwinds for Equity Markets Should Pick Up
Although several major equity markets are at or near their all-time highs, investors remain nervous and uneasy about the state of the global economy (as evidenced by extremely low government bond yields). In recent weeks, investors have been focusing on relatively weak U.S. economic data, geopolitical turmoil, Greece’s debt woes and the strength of the U.S. dollar. The last item on this list has been a particular source of worry, with some fearing the dollar’s strength could jeopardize the U.S. recovery and trigger debt defaults in emerging economies. In our view, neither is likely. The rising value of the dollar is consistent with an improving domestic economy, and it also helps promote global growth.
We believe U.S. growth will bounce back in the coming quarters given the strength in the labor market and a solid backdrop for consumer spending. Outside the United States, growth has been patchy but is showing signs of improvement. Supportive monetary policy remains a powerful force for global growth, and in our view, structural headwinds and risks to growth have been diminishing. The global economy remains vulnerable, but we believe it is healthier than at any time since the Great Recession began.
From an investment perspective, we would point to several considerations in light of our constructive outlook. The first is that bond market volatility is likely to rise as we approach the start of the Fed rate increase cycle. Equity market volatility should move higher as well, but we think equities are more attractively valued than government bonds. Given this environment, we continue to advocate overweight positions in equities, underweight positions in Treasuries and commodities and a neutral stance toward cash.
1 Source: Morningstar Direct and Bloomberg, as of 4/10/14 2 Source: Bureau of Labor Statistics 3 Source: Strategas Research Partners
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-BDCOMM2-0415P 7052-INV-W-04/16
