Equities Rally as Oil and Monetary Policy
Remain in Focus
February 1, 2016
by Robert Doll
of Nuveen Asset Management
Key Points
▪ Equity prices rose as markets continue to follow the lead from oil prices.
▪ Over time, we expect oil to stabilize and believe that global monetary policy remains a tailwind for risk
assets.
▪ Turbulence is likely to continue, but for those who can tolerate the swings, we think it makes sense to
stick with a pro-growth investment stance.
Volatility remained high last week as U.S. equities regained some ground, with the S&P 500 Index
rising 1.8%.1 Stocks soared on Friday in response to the Bank of Japan’s decision to adopt a negative
interest rate stance. Oil prices also rose over speculation that global production might fall. Corporate
earnings were mixed, as results continued to be held back by the long-term decline in lower oil prices,
a soft economic backdrop and the strong dollar.
Weekly Top Themes
1. Fourth quarter gross domestic product growth was soft. The economy grew an anemic 0.7%
last quarter, with growth held back by slowing consumer spending and the first decline in business
investment since 2012.2 A slowdown in inventory investment also detracted from results.2 For the year
as a whole, 2015 growth increased a respectable 2.4%, matching the pace seen in 2014.2
2. Last week’s Fed meeting came with no real surprises as the central bank adopted a slightly
more dovish tone. The Fed noted somewhat weaker economic growth, but also sounded upbeat
about demand and employment indicators. Policymakers also indicated that inflation remains low and
stated they were “closely monitoring global economic and financial developments.” Absent a quick and
dramatic economic improvement, we do not expect another interest rate increase before June.
3. The energy sector continues to weigh on corporate earnings. With over half of companies
reporting fourth quarter results, earnings are beating expectations by 4.9% and revenues are missing
by 0.3%.3 Earnings-per-share are on track to be flat for the quarter, and up about 6% excluding
energy.3
4. Consumer confidence may be slowly improving. The Conference Board’s Consumer
4
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Confidence Index increased 1.8 points in January, beating expectations.4 Consumers may be looking
past equity market weakness and focusing on the positives.
5. The anticipated “oil dividend” has yet to appear. Since oil prices started falling in 2014, many
observers (us included) expected to see an increase in consumer and business spending. It doesn’t
appear that this has yet occurred, and it looks to us as if most individuals are saving their extra
disposable income rather than spending it. We expect consumer spending to rise, but acknowledge
that lower oil prices have so far caused more pain than benefits.
A Pro-Growth Stance Makes Sense, but Requires Patience
Investors have grown more risk-averse in recent weeks with slowing growth in China, oil price volatility,
weakness in manufacturing and Fed policy topping the list of concerns. Economic data has generally
been stronger than reflected by financial market movements, and investors seem to be ignoring
positive economic news and overly focusing on the negatives. At this juncture, we think investors have
three options: (1) retreat and unload risk assets in anticipation of a recession, (2) pause, become
slightly more conservative and await more clarity, or (3) maintain a pro-growth stance and accept that
more near-term turbulence may occur before risk assets experience a sustained upturn. We think the
first strategy is overly pessimistic and believe economic fundamentals are better than what is priced
into the market. The second option may be reasonable for investors who are having difficulty
weathering the current volatility. But for investors with long-term time horizons, we think option three is
most prudent.
It may take some time, but we expect that oil prices should stabilize and cease being the main
determinant of global financial market prices. The long-term drop in oil should produce some economic
stimulus and become more of a positive. Additionally, global monetary policy remains a tailwind for risk
assets. The Fed is likely to raise rates, but any increase should be measured and slow. And last week’s
news from Japan reiterates that policy around the world remains in easing mode. Investors are also
awaiting signs of a global manufacturing recovery, which would promote greater confidence in the
strength of the world economy.
Our view is that financial markets have overreacted to the negatives. Turbulence is likely to continue,
but we expect both equity prices and bond yields to rise over the course of 2016.
Page 2, ©2016 Advisor Perspectives, Inc. All rights reserved.
1
Source: Morningstar Direct, as of 1/29/16
2
Source: Commerce Department
3
Source: FactSet
4
Source: Conference Board
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
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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 floatadjusted 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. Noninvestmentgrade 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.
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