Key Points
▪ Equity prices have advanced more than 1% in each of the past three weeks as investors have come to realize that stocks appear more attractive than bonds.
▪ We see a number of risks that could impede the economy and equity bull market, but we think the positives should win out.
The S&P 500 Index advanced 1.5% last week, marking the third straight week in which U.S. stocks advanced more than 1%.1 We attribute the recent rally to three factors: 1) A growing realization that equities are more attractive than bonds, given low Treasury yields; 2) An improving corporate earnings outlook for the next 12 months; and 3) A sense that Brexit risks should be relatively well contained thanks in part to stability in the banking system.1
Weekly Top Themes
1. Second quarter growth should improve, but the economy may slow in the third quarter. First quarter real gross domestic product growth was 1.1%,2 and we believe the second quarter should come in at around 2.5%. Looking ahead, that pace may slow due to deteriorating U.S. trade conditions, declining business confidence and a possible cooling off in consumer spending.
2. Bond yields are likely to trend higher. In our view, low Treasury yields are due more to overseas forces than domestic factors. In particular, the rising trend of negative government bond yields throughout the world is causing a significant drag on U.S. rates. Given positive (if slow) economic growth and modestly rising inflation in the United States, we expect U.S. yields should rise. As long as the increase is moderate and due to firmer growth levels, we think such an advance should support equities.
3. We think fiscal policy stimulus is likely in 2017. U.S. monetary policy remains accommodative, but will likely tighten slowly over the next 18 months. The prevailing political backdrop suggests we will see a fresh push for infrastructure spending and increases in other government programs after a new government is sworn in next year. To help pay for such spending, we think it is likely that we will see taxation on repatriated foreign earnings.
4. Geopolitical risks are rising, but so far have had limited economic and financial impact. The sheer number of horrific events that have occurred over the past few weeks is staggering. Terrorist attacks, political instability, growing violence in the United States directed at police and the attempted military coup in Turkey have all dominated the headlines. The investment implications have been modest, but these risks bear close attention for their broader political implications.
5. Historical trends suggest recent highs are bullish for equities. Last week’s new high for the S&P 500 Index was the first such new high since May 2015.3 Since 1950, this marks the 15th time that it took the index 12 months or more to mark a new high from the previous one.3 In the 14 previous occasions, the index was higher a year after the new high every time. 3 The average 12-month gain was 18% and the smallest gain was 3.1%.3 In addition, the next major peak for the stock market occurred a minimum of 15 month after the new high.3
There Are More Reasons to Be Positive than Negative
Despite the recent highs in stock prices, investors remain uneasy about a number of issues, including uncertainty over global economic growth, monetary policy and financial market valuations. On balance, we remain cautiously optimistic, and close with a list of reasons to be positive, and to be cautious, adapted from J.P. Morgan:4
For more information or to subscribe, please visit nuveen.com.
1 Source: Morningstar Direct, as of 7/15/16
2 Source: Commerce Department
3 Source: Strategas, Wampum
4 Source: Adapted from J.P. Morgan, U.S. bull/bear debate week of 7/18/16
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The Nasdaq Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market. 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. 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. MSCI EAFE Index is a free float-adjusted market capitalization weighted index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. Barclays U.S. Aggregate Bond Index covers the U.S. investment grade fixed rate bond market. The BofA Merrill Lynch 3-Month U.S. Treasury Bill Index is an unmanaged market index of U.S. Treasury securities maturing in 90 days that assumes reinvestment of all income.
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.
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc.
©2016 Nuveen Investments, Inc. All rights reserved.
