Global equities wobble but don’t fall hard despite negative headlines

Brian Nick

Article Highlights

Quote of the week

“That’s all I can stands. I can’t stands no more.” – Popeye

The Lead Story: Signs of “quit” in this equity market?

The current U.S. equity bull market remains among the most unloved—and most resilient—in recent history. Even as investors continue to move money out of domestic stocks in favor of U.S. fixed income and foreign stocks, the S&P 500 Index has not experienced a 5% correction for over a year, the longest such streak since the mid-1990s. 

U.S. stocks demonstrated further resilience during the week. A negative news cycle that included the dissolution of President Trump’s two business advisory councils in the wake of the Charlottesville protest added to concerns about the White House’s ability to advance its business-friendly agenda. Nonetheless, the S&P 500 Index fell just 0.6%. A 1% advance to start the week was wiped away by a 1.5% drop on August 17, marking the first time the index has had both a 1% up and 1% down trading day in the same week since last September. 
Europe’s STOXX 600 Index (-0.06% in U.S. dollar terms) also endured some volatility. Reports of a terrorist attack in Spain tempered enthusiasm for news that Eurozone GDP grew by 0.6% in the second quarter, pushing its year-over-year expansion from the same quarter last year to 2.2%.  

Investors should remember, though, that resilience does not equal complacence. It’s neither random nor accidental that financial markets have grown somewhat immune to headline risk. Global growth is stronger, with a broader base, than it has been in more than a decade. In addition, corporate earnings growth is still supportive of equity markets, and global monetary policy remains accommodative. Even where central banks are dialing back stimulus, such as in the U.S, they are doing so slowly. 

At the same time, resilience may only help stocks stay at their current elevated levels. It’s less clear what would continue to drive equities higher in the coming months.

In fixed-income markets, the yield on the bellwether 10-year U.S. Treasury began the week at 2.19% and climbed to 2.28% on August 15—largely in response to solid retail sales data. The yield fell to 2.20% on August 18, however, as nervous investors scooped up safe-haven assets. (Yield and price move in opposite directions.) Results for non-Treasury sectors were mostly positive, led by investment-grade (+0.23%) and high-yield (+0.13%) corporate bonds.   

Although we still believe the possibility of recession is low and that fixed-income credit sectors remain attractively valued, we are currently maintaining slightly higher cash positions in our portfolios. The fall season has historically been a challenging time, and this year’s post-Labor Day period might be even more so. Several risk events, including a potential debt-ceiling debate, could temporarily rattle markets, driving down bond prices and providing opportunities among non-Treasury asset classes.

In other news: Small-caps stall

Last year, the small-cap Russell 2000 Index (+21.3%) outpaced the large-cap S&P 500 (+12.0%) by a healthy nine percentage points, reversing two years of underperformance. But small caps have relinquished that lead this year through August 17, returning only 0.9% and lagging the S&P 500 (+10.0%) by nine percentage points. With their domestic focus, small caps have been hurt by tepid economic growth and stood to gain from comprehensive tax reform, the prospects for which have dwindled throughout the year. Meanwhile, a weak dollar has benefited sales and profits of larger-cap multinationals by making their exports less expensive in overseas markets. Despite their relatively attractive valuations, we’re neutral on small caps given the potential for further U.S. dollar weakening and political uncertainty in Washington.

Below the fold: Got a minute?

During the week, the Federal Reserve and the European Central Bank (ECB) released minutes from their respective July meetings. The ECB fretted about the euro’s strength, a potential headwind to both the Eurozone’s recovery and the ECB’s efforts to lift inflation. Based on preliminary data, inflation rose just 1.3% in July compared to a year ago. 

Fed officials debated the U.S. inflation outlook, with some taking the view that further rate hikes should be shelved until data confirms that the recent weak inflation data is transitory. More hawkish members cautioned that such a delay could lead to an overshooting of inflation “that would be likely be costly to reverse.”  

During the week, U.S. data releases were mostly positive, with homebuilders and consumers especially enthusiastic.
  • Consumer sentiment topped forecasts by hitting its highest level since January, according to the preliminary July reading of the University of Michigan index. Consumers cited a more positive outlook for the overall economy and favorable personal financial prospects.
  • This optimistic outlook translated to a better-than-expected 0.6% jump in July’s retail sales, the largest one-month increase this year. In addition, sales for May and June were revised higher. 
  • Bolstered by ongoing job growth and attractive mortgage rates, the NAHB homebuilder sentiment index rebounded from June’s eight-month low. In contrast, housing starts declined 4.8% in July, and building permits, a forward looking indicator, also fell.
  • The Conference Board’s gauge of leading economic indicators rose for the seventh consecutive month in July, suggesting the U.S. economy may experience further improvements in economic activity in the second half of the year.
This material is prepared by and represents the views of Brian Nick, and does not necessarily represent the views of Nuveen LLC, its affiliates or other Nuveen staff.
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