04.05.21

Equity markets rally as global growth strengthens

Brian Nick

The last week’s market highlights:

Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s Q2 2021 Outlook:
 
  • U.S. economy: Poised for its best year of GDP growth in decades.
  • Global economy: Should also surge as large developed countries sprint into the post-pandemic world.
  • Policy watch: No Federal Reserve interest-rate hikes until at least 2023.
  • Fixed income: Take more risk in credit-sensitive parts of the market.
  • Equities: Bullish on cyclicals but looking for opportunities again in growth.
  • Asset allocation: Consider benefits of active management amid idiosyncratic opportunities.
 

Quote of the week:

“Oh put me in coach, I'm ready to play today/Put me in coach, I'm ready to play today/Look at me, I can be centerfield.” — John Fogerty, “Centerfield”
 

A “million jobs” report means the boom is already here

Leading up to this past Friday’s release of the March employment report, we anticipated that job creation would exceed forecasts, and, indeed, it did – in spectacular fashion. The groundwork for the blow-out results were laid throughout the first quarter, as business confidence rose, personal income and spending increased thanks to the year-end $900 billion fiscal aid package, and COVID 19-related fears diminished amid an accelerating vaccine rollout and the easing of many local restrictions on business activity. Investors looking for another signpost that a rapid U.S. economic recovery is already underway certainly found it. Just how good was the March report?
 
  • Nonfarm payrolls grew by 916,000, compared to expectations of “just” 660,000 among economists surveyed by Bloomberg. This monthly gain was the biggest gain since last August.7 What’s more, prior months’ payrolls were revised upward by a cumulative 156,000 — effectively making this a “million jobs” report.7
  • Job growth was especially encouraging among closely watched categories of workers. The leisure and hospitality sectors added 280,000 jobs in March, while state and local governments grew by 136,000, as many schools around the country are finally in some stage of reopening.8
  • The unemployment rate fell to 6.0% from 6.2%, as expected, with the added benefit that the labor force participation rate ticked up by 0.1%, or 347,000 people.9 Interestingly, participation among men actually dropped a bit, but the increase among women more than made up for it.10
  • While average hourly earnings dipped, this is a feature — not a bug — of the current labor market recovery.11 Most of the jobs that are returning pay lower-than-average wages. As they’re added back into the overall composition of jobs, the average earnings figure is pulled down.
 
In all, this was a blockbuster jobs report, both at the headline level and in the underlying details. We expect there will be many more to come.
 

What’s ahead as markets spring into spring? Read what our investment experts have to say 

If you’re looking to make sense of the always-shifting financial markets and economic landscape, Nuveen’s Global Investment Committee (GIC) can help. This committee brings together the most senior investors from across the firm’s platform of core and specialist capabilities, including all public and private markets.
 
According to the GIC’s newly published Q2 2021 Outlook, “Welcome to the Upside Scenario,” the recent market rotation into economically sensitive assets is likely to endure, bolstered by strong private-sector balance sheets, surging economic growth and a sharp bounce in corporate profits. Among the specific asset classes the committee believes offer the most compelling investment opportunities are emerging market (EM) equities and fixed income, leveraged loans, U.S. small cap stocks and most real asset categories, including real estate.
 
The upside scenario has materialized
 
Three months ago, the GIC offered an optimistic 2021 outlook for the global economy and financial markets. Evidence since then suggests that outlook may not have been optimistic enough. The committee now expects global growth this year to surge by the most in decades, thanks to (1) multiple safe and effective COVID-19 vaccines inoculating a rapidly growing share of the global population, (2) sharp declines in new cases in most of the countries hit hardest by the virus, (3) unprecedented U.S. fiscal stimulus and (4) dovish monetary policy worldwide.
 
Global manufacturing activity hit a Stellar economic data has been abundant of late, reinforcing the GIC’s perspective. For example:
 
  • 10-year high in March, as growth in new orders, output and employment gathered speed.12
  • The U.S. labor market has continued to strengthen, evidenced in the March employment report released on April 2.
  • Various sentiment surveys perked up notably last month. Germany’s closely watched ifo Business Climate Index jumped to its highest level since June 2019. And in the U.S., The Conference Board’s Consumer Confidence Index reached its best reading in a year.13
 
Amid this upbeat news, we’re still mindful of a threat to our upside scenario: inflation. Running ultra-loose fiscal and monetary policy in what we expect to be an extraordinary year for the U.S. economy has many investors worried about rising prices. A spike in inflation can derail consumer confidence and undermine investment portfolio performance, putting simultaneous pressure on stock valuations and bond prices.
 
While inflation is almost certain to move higher this spring, we think it will do so only temporarily, and mostly due to a data quirk. As last year’s extremely weak inflation readings for March and April roll off of the 12-month observation period, the year-over-year inflation rate will inevitably increase. But this “base effect” rise is something investors can safely ignore, in our view.
 
Inflation could also return this summer for more economically relevant reasons. As more consumers shift their spending from goods to services, demand in sectors such as travel, hotels and restarurants could overwhelm supply. The overall pickup in prices, however, is likely to be modest and should pass as supply rises to meet demand.
Sources:
  1. BLS
  2. Haver
  3. Russell
  4. New York Times
  5. The Conference Board, ISM
  6. U.S. Treasury via Haver
  7. Bloomberg, BLS via Haver, BLS
  8. Bloomberg, BLS
  9. Bloomberg, BLS, BLS via Haver
  10. Bloomberg
  11. BLS
  12. JPMorgan
  13. Ifo Institute, The Conference Board
 
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.
 
These views are presented for informational purposes only and may change in response to changing economic and market conditions. This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor's objectives and circumstances and in consultation with his or her financial professionals. Certain products and services may not be available to all entities or persons. Past performance is not indicative of future results. Economic and market forecasts are subject to uncertainty and may change based on varying market conditions, political and economic developments.
 
All investments carry a certain degree of risk, including possible loss of principal, 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. Any investment in taxable fixed-income securities is subject to certain risks, including credit risk, interest-rate risk, foreign risk, and currency risk. There are specific risks associated with international investing, which include but are not limited to foreign company risk, adverse political risk, market risk, currency risk and correlation risk. In addition, investing in securities of developing countries involve greater risk than, or in addition to, investing in developed foreign countries.
 
The investment advisory services, strategies and expertise of TIAA Investments, a division of Nuveen, are provided by Teachers Advisors, LLC and TIAA-CREF Investment Management, LLC.
1589483