WILLIAM RIEGEL, CHIEF INVESTMENT OFFICER
April 24, 2015
U.S. equities closed at their best levels since early March. The S&P 500 Index briefly eclipsed its all-time intraday high and ended the week at a new record close of 2,118. Consumer cyclical stocks, a bellwether for a strengthening economy, continued to lead the way. Technology shares in particular have outperformed, evidenced by a new record close for the NASDAQ as well. The recent equity rally has been underpinned by a revival in share buybacks and mergers & acquisitions, the relative attractiveness of stocks versus bonds, and first-quarter corporate earnings, which, while far from stellar, have generally come in better than expected.”
Stocks in Europe moved slightly higher for the week. Positive economic news out of Germany outweighed other disappointing data releases, mixed earnings reports, and worries over the Greek debt saga.
William Riegel, Chief Investment Officer, TIAA Investments
Asset flows into fixed-income funds were muted, except for investment-grade corporate bonds. New issuance is being readily absorbed by the market as significant demand continues for the high-quality debt needed by insurers, money managers, pensions, and central banks. Market sentiment has lately been less focused on rhetoric about the exact timing of a Federal Reserve interest-rate hike, instead taking cues from economic releases. Spreads for higher-yielding, non-U.S. Treasury sectors may widen if economic releases strengthen, potentially signaling a faster pace of rate increases by the Fed.
A raft of recent economic releases has signaled stronger growth in the Eurozone, as the region has benefited from the quantitative easing (QE) program initiated by the European Central Bank (ECB) on March 9. Since then, the ECB’s balance sheet has grown by €210 billion, putting the central bank on a pace to reach its €1 trillion expansion goal before the end of 2015, well ahead of its September 2016 target. We expect the ECB to keep its foot on the liquidity pedal until at least the fall of next year.
Since the U.S. recovery began, the first quarter of each year has been sluggish; this one will be prove to be no different. We expected a weak January and February, but the rebound we anticipated for March failed to materialize. Therefore, we are lowering our first-quarter GDP estimate again, from 1.5% to 1.0%. We expect the government’s initial first-quarter GDP estimate to come in at +1%, with subsequent downward revisions likely. Markets may respond unfavorably, but it’s important to remember that the first quarter’s significant headwinds were mostly transitory. The soft first quarter has also prompted us to lower our overall 2015 GDP forecast, from 3.0% to 2.7%, but we take heart in that recent market movements have been led by more cyclical sectors.
Also on the economic front, we remain puzzled by the inability of lower gas prices to jumpstart U.S. consumer spending. While this could simply mean that consumers are saving the windfall until their sentiment improves, recent gains in consumer confidence measures may indicate a secular change in spending habits as the U.S. population ages. We should have a clearer picture by mid-year.
In U.S. equity markets, contrarian indicators point to a continued advance for the S&P 500. Long-term sentiment remains negative, Wall Street strategists are still underweighting equities, hedge fund net exposures are only slightly above 50, and—for the first time in over a decade—corporate pension funds hold more bonds than stocks. For the fixed-income markets, we believe current Treasury yields and broad fixed-income spreads broadly are fairly priced.
Regarding Greece, domestic public approval of the government’s negotiating tactics has fallen from 76% to 46%, while a desire to remain within the Eurozone remains high. In our view, the odds of a “Grexit” have risen somewhat but remain at about 30% or less. It appears that Greece should be able to meet an upcoming €750 million payment to the International Monetary Fund, but unlocking bailout funds to fulfill additional obligations, will require Athens to reach an agreement with its international creditors or face the prospect of default. We think this uncertainty will likely continue through June but believe that a rational outcome will ultimately prevail.
TIAA-CREF Asset Management provides investment advice and portfolio management services to the TIAA-CREF group of companies through the following entities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, and Teachers Insurance and Annuity Association® (TIAA®). Teachers Advisors, Inc. is a registered investment advisor and wholly owned subsidiary of Teachers Insurance and Annuity Association (TIAA). Past performance is no guarantee of future results.
Foreign stock market returns are stated in U.S. dollars unless noted otherwise.
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