Key Points
▪ We believe global economic growth is improving, which should help corporate earnings experience stronger tailwinds in the months ahead.
▪ This leads us to adopt a “pro-risk” view, believing that equities appear more attractive than other asset classes.
A number of issues garnered attention last week, including falling oil prices, a sell-off in Chinese equities, ongoing corporate deal activity and mixed economic and earnings data. The Federal Reserve’s policy meeting was also in focus, and while it resulted in little real news, the accompanying statement nonetheless caused debate about when the Fed would finally begin increasing interest rates. In all, equity markets trended in a positive direction for the week (after a significant downturn the previous week), with the S&P 500 Index climbing 1.2%.1 With the exception of energy, which was hurt by falling oil prices, all sectors of the market were in positive territory.1
Weekly Top Themes
1. The second quarter gross domestic product report was somewhat disappointing, but we expect a rebound in the coming quarters. Real GDP growth came in at 2.3%, which was below expectations.2 The good news was that an upward revision to first quarter growth means that the economy actually grew during the first three months of the year.2 Additionally, consumer spending was relatively strong,2 which we believe is positive for stronger growth in the coming months.
2. The Fed is inching closer to moving rates higher. In the statement that accompanied the central bank’s policy meeting, the Fed pointed to “solid” jobs growth, and we believe the central bank is waiting for a little more progress before taking action. The Fed has not provided a clear signal either way about whether it will raise rates in September, but we believe the chances are better than not that it will take action.
3. Corporate earnings trends are looking relatively strong. At this point, twothirds of companies have reported second-quarter results, and earnings-per-share positive surprises are outpacing negative surprises by a three-to-one margin.3 On average, earnings are beating expectations by more than 5%, while revenues are flat versus analyst estimates.3
4. We do not believe the current equity bull market will be ending any time soon. In our experience, bull markets tend to end under three circumstances. First, when rising inflation triggers aggressive Fed tightening. Second, when policymakers make some sort of mistake. And third, when an external shock occurs. While the third circumstance is impossible to predict, we see no signs that either of the first two are on the horizon.
We Expect Equities Will Outperform Other Asset Classes
Overall, we believe monetary policy, economic trends, valuations and investor positioning remain positive for equities, especially when compared with bonds or other asset classes. Equity markets have experienced several bumps over the past few years, but have remained resilient — a pattern we expect will persist. The latest challenge has been a renewed downturn in oil prices, but unlike last year, this has not triggered broader deflationary concerns. We expect investors should eventually see more benefits as lower energy prices can stimulate economic growth and corporate earnings. This should ultimately provide a tailwind for stock prices.
The global economy is improving gradually, if unevenly. The euro area remains troubled, but has shown stability in the face of the latest Greek debt crisis, which we take to be a good sign. The U.S. economy appears to be gaining momentum after a winter slowdown, and we think the signs point to improved growth in the coming quarters. In our view, corporate earnings have more tailwinds than headwinds, which should help equities continue moving higher.
While we would not be surprised to see some sort of near-term equity market consolidation and think market technicals appear stretched, we would retain a prorisk investment stance with an emphasis on equities, based on five key points:
1. Global monetary conditions should remain highly accommodative even when the Fed begins raising rates.
2. The U.S.-led global economic expansion should continue, with Europe showing ongoing improvement and the Chinese economy lagging.
3. Some areas of the bond market (especially Treasuries) appear expensive in absolute and relative terms.
4. Commodities remain under pressure and are broadly unappealing.
5. We believe equities offer decent absolute value and are attractive relative to other potential investments.
1 Source: Morningstar Direct, as of 7/31/15
2 Source: Commerce Department
3 Source: Wells Fargo Securities
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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