U.S. equity advances ended last week and the S&P 500 declined -1.0%.1 Markets appeared concerned about overbought conditions from a strong run up over the past three weeks and uneasy about Federal Reserve (Fed) monetary policy normalization as well as the credibility of its communication strategy. Other widespread reasons for the downturn included increased focus on the fiscal battles in Washington, D.C., heightened worries about a possible near-term government shutdown and the contentious debt ceiling debate.
The Taper Conversation Continues…
The market is still debating the implications of the unexpected and historic FOMC decision not to begin tapering the pace of asset buying. Several reasons are behind the Fed’s decision not to change its current course:
· The economic data have not been strong enough
· Inflation is too low
· U.S. budget battles could generate volatility
· The bond market’s severe reaction to tapering guidance was surprising
Importantly, the Fed reiterated its commitment to ensure that economic growth is sustainable before it will remove liquidity or reduce the rate of accommodation through tapering. Also, asset price inflation was reinforced as a key policy goal.
Bond yields have stopped climbing and the U.S. dollar has pulled back, partially reversing the tightening in monetary conditions experienced this summer. The decisive stabilization in recent global economic and trade data suggests an inflection point in top-line growth may be at hand. The evident improvement in key forward leading indicators implies that growth may be accelerating. Global manufacturing and non-manufacturing activity is gaining momentum after several years of weak activity.2 Increased growth in Asia and Europe bodes well for U.S. exports.
Weekly Top Themes
1. The stock market has taken a pause over the past week and the news in Washington continues to make headlines. We think that there are two main differences from the 2011 debt ceiling debate: very few austerity measures will be passed (which is better for growth), and another U.S. debt downgrade is unlikely because the budget deficit is already improving. Nevertheless, the uncertainty of a possible government shutdown and debt ceiling risks will weigh on the market.
2. The general election in Germany produced a positive market outcome. The election gives Chancellor Angela Merkel a major electoral win and an important political mandate. The win suggests that Merkel has received strong support from the German public for Euro area reform. The immediate investment implications are bullish for European equities, including Germany.
3. Third quarter earnings releases are set to begin and expected to be sluggish. Investors may shift their attention from Fed policy statements and U.S. political conflict toward corporate earnings. Bottom-up estimates have slipped, and third quarter earnings are only expected to deliver 2-3% growth versus last year. Consensus estimates for 2014 also appear too high and a reduction is likely.
The Big Picture
Looking beyond U.S. political drama, we continue to recommend a moderately pro-growth equity portfolio reinforced by views for a gradually improving global economy and reflationary monetary environment. Global growth should gradually improve based on stimulative conditions and slowly diminishing structural headwinds in key countries. We believe this backdrop favors cyclical investments at the expense of defensive equities. Growth will be led by the United States, but stability in China will also provide important support for global activity. Major central banks are committed to supporting the economic recovery and should maintain highly reflationary policies for the foreseeable future. ▪
2013 Performance Year to Date
Source: Morningstar Direct and Bloomberg, as of 9/27/13. All index returns are shown in U.S. dollars. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. Index returns include reinvestment of income and do not reflect investment advisory and other fees that would reduce performance in an actual client account. All indices are unmanaged and unavailable for direct investment.
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1 1 Source: Morningstar Direct, as of 9/27/13. 2 Source: Institute for Supply Management, “August 2013 Manufacturing ISM Report on Business,®” September 3, 2013, http://www.ism.ws/ismreport/ mfgrob.cfm and HSBC, “Emerging Markets PMI,” September 2013, http://www.hsbc.com/news-and-insight/emerging-markets.
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. Non-investment-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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