U.S. equities experienced their largest one-week gain since late March last week, with the S&P 500 Index rising 2.4%.1 Much of the gain came from an easing of Greece’s debt problems and a calming of volatility in China’s equity market. In both cases, policymakers achieved some breathing room, but fundamental issues remain. Greece must still engage in some serious structural reforms and the Chinese economy is still experiencing a significant slowdown. In addition to easing global tensions, U.S. equities were buoyed by positive earnings surprises that came against lowered expectations. On the negative side, June retail sales disappointed. The technology and financial sectors were the best performing areas of the market last week, while energy and materials struggled.1 In other markets, Treasuries were mixed as the yield curve flattened, while commodity prices experienced a pullback.1
Key Points
▪ Risks in Greece and China receded, which allowed investors to focus on the prospects for better economic growth and improving corporate earnings.
▪ Global risks have not vanished, but assuming corporate earnings can rise, equity prices should be able to advance.
Weekly Top Themes
1. Weak retail sales figures show the consumer sector is still not firing on all cylinders. Sales unexpectedly fell 0.3% in June,2 although we expect to see a rebound in the data going forward. Solid levels of jobs growth and still-low energy prices and interest rates should provide tailwinds for consumer spending.
2. A rise in industrial production shows the negative effects from weakness in oil prices may be fading. Plummeting oil prices in late 2014 resulted a sharp decline in energy-related production that persisted through the first half of 2015. In June, however, industrial production rose 0.3%, suggesting this negative economic trend may be ending.3
3. We are seeing early signs of upward pressure on wages. We think it is inevitable that continued jobs growth and falling unemployment will raise wage pressures. And based on our conversations with corporate management teams, many companies are ramping up hiring plans at the same time that demand for high-skilled labor is growing.
4. Signs point to Federal Reserve rate hikes starting this year. We believe the U.S. economy is accelerating. Improvements in the housing market and manufacturing are good signs, and we expect to see a rebound in consumer spending. In her testimony to Congress last week, Fed Chair Janet Yellen stated, “If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy.”3 Our best guess for timing is September.
5. Global monetary policy should remain highly accommodative for some time. When the Fed does begin to raise rates, we expect it will do so slowly. And even with a handful of rate increases, interest rates in the United States will still be very low by historic standards. Outside of the United States, many central banks are still in the midst of easing cycles. In all, monetary policy around the world should provide a boost to global economic growth.
A Corporate Earnings Rebound Should Lift Equities
Over the past few weeks, financial markets endured some serious risks, with the focus centered on Greece and China. Yet global equity prices remained resilient, which suggests that the years-long bull market still has legs. At the same time, global government bond yields held relatively steady rather than retreating, which may be a sign that investors are expecting global economic growth to push ahead. Encouragingly, these risks appear to be receding for now. The Greek government has given in to austerity demands, the Chinese government has stemmed the equity sell-off and the nuclear deal with Iran may ease tensions in the Middle East.
At some point, one of these issues will resurface or another issue will emerge that could spark more investor unease. But for now, investors appear focused on fundamental improvements in the economy and the prospects for corporate earnings. U.S. economic data remains choppy, but points to broad improvements. And we think the prospects for corporate earnings are brightening. At this point, analysts are projecting U.S. corporate earnings will grow a paltry 1% for 2015.4 In our view, these expectations are too pessimistic. Assuming economic growth improves as we expect, we should see stronger earnings results. This should allow equity prices more room to rise.
1 Source: Morningstar Direct and Bloomberg, as of 7/17/15
2 Source: Department of Commerce
3 Source: Federal Reserve
4 Source: FactSet
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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