The continued advance in global bond yields dominated the financial story again last week, although this trend eased slightly by the end of the week. Economic data featured a relatively weak retail sales report. Notwithstanding these factors, U.S. equities advanced, with the S&P 500 Index hitting another record high as it gained 0.4%.1 The consumer staples, health care, industrials and technology sectors led the way, while energy was the worst-performing area of the market.1
Weekly Top Themes
1. Retail sales figures are not climbing as anticipated. Despite solid employment gains, retail sales were flat for April, suggesting that consumers are continuing to save rather than spend.2 We expect spending levels to rise in the coming months, but the consumer sector is not currently helping growth as much as many anticipated.
2. U.S. economic growth is not yet accelerating. Following a weak first quarter, most economic data suggest that the second quarter has not yet picked up noticeably. We would not be surprised to see first quarter gross domestic product growth revised lower. While the second quarter should be better than the first, those numbers may also be disappointing.
3. It will be difficult for the “Goldilocks” investing backdrop to persist. For the past six years, investors enjoyed an economic backdrop strong enough to push most asset classes higher but not so strong that inflation or tightening monetary policy emerged as threats. With uneven economic growth and emerging signs of wage inflation, we believe the investing environment is becoming more difficult and that selectivity is growing in importance.
4. Global growth prospects appear mixed. We expect Europe to become a stronger tailwind for the world economy thanks to low commodity prices, a cheaper euro and an accommodative central bank. In contrast, it looks to us like Chinese growth will continue to decelerate.
5. Overall, we believe the global economy will improve in the coming months. The “stronger dollar/weaker commodities” trade that emerged in the middle of last year indicated investors were expecting global growth to be soft as deflation fears were rising. We have begun to see the strength of that trade diminish with deflation risks fading and growth prospects improving.
Investor Confidence Should Pick Up in the Coming Months
Concerns over deflation are fading as it becomes increasingly clear that global growth is recovering. Economic conditions around the world and in the United States remain uneven, but we still believe that Federal Reserve rate hikes are inevitable. As we approach the first rate increases, investor anxiety will likely increase as worries mount that the Fed will become too aggressive and act in a manner that is detrimental to economic growth. It may seem odd that this would become a concern considering how dovish the Fed has been and how much central bankers have focused on transparency. But the 2013 “taper tantrum” taught us that investors are prone to overreaction and that once yields start rising, many will become concerned about the possibility of deflation and economic stagnation.
Because of these concerns, one of the prominent near-term risks for equities is that bond yields will advance too quickly, which could trip up the stock market. We think such a scenario is unlikely. Improving global growth and a pending shift in Federal Reserve policy will put upward pressure on bond yields. But many regions of the world are still in an easing cycle, which should prevent yields from advancing too dramatically. For its part, the Fed should proceed cautiously so as not to risk slowing U.S. growth. Once the Fed starts to act, we believe investor confidence will rise. As such, we expect any setbacks in equities that result from rising rates to be temporary.
Likewise, we believe the dramatic volatility in currency and commodity markets is starting to fade. These markets remain unsettled and may continue to be choppy for some time, but should calm somewhat. Increased stability should provide a further boost to investor confidence. Overall, we acknowledge clear risks to the global economy, but we continue to advocate a pro-growth investment stance and favor overweight positions for equities.
1 Source: Morningstar Direct, as of 6/20/14
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.
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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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