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Weekly Equity Market Commentary

Equities notch new highs despite hot inflation data

Equities Investment Council
The Nuveen Equities Investment Council is led by Saira Malik and comprises the firm’s senior portfolio managers averaging three decades of investing experience.
Saira Malik
CIO, Head of Global Equities
Equities Investment Council member Saira Malik

Weekly market update highlights

Global equity markets were mostly positive last week. In the U.S., the S&P 500 and tech-heavy Nasdaq added 0.4% and 1.9%, respectively, while the DJIA fell 0.8%. Elsewhere, the MSCI EAFE, EM, and ACWI ex-USA indexes notched nominal gains, between 0.1% and 0.3%, each. The S&P 500 reached a new record high of 4,247 at the close on Friday.

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Economic week in review

Market drivers & risks

Reopening trends, vaccine rollouts, relative valuations and sector weightings suggest a bump for non-U.S. markets.

Risks to our outlook

Though inflation concerns appear to have moderated, we expect volatility to spike around further data indicating accelerating wage growth and/or prices. Should price increases begin to spread beyond their current narrow scope, or if employers continue to hike pay to attract or retain workers, the Fed may feel the need to more openly discussing tapering.

Related, we think labor supply constraints may exert a drag on the economy’s return to “normal.” With businesses finding it increasingly difficult to fill positions, we are starting to see signs of flattening mobility, which could hamper economic and earnings growth.

We are mindful that the COVID-19 pandemic remains a serious challenge, despite largely successful vaccination efforts in the U.S. and other developed countries. Continuing to reopen the economy at the current or accelerated pace could present the risk of another spike in case counts, potentially leading to localized or regional shutdowns and an air pocket in the recovery. This would almost certainly weigh on investor sentiment and spark further volatility.

Best ideas

Improvements in vaccinations and economic reopenings make U.S. small caps particularly attractive. We are also seeing near-term opportunities in Europe, which looks relatively inexpensive and should benefit from continued easy monetary policy. We favor industrials that will likely benefit from publicly funded infrastructure investments and higher capital expenditures. We also remain bullish on emerging markets over the long term and expect necessary efforts to stem the spread of the virus will eventually take hold.

In focus: Better times ahead for non-U.S. stocks

While the global economic recovery continues, its rate has varied. This diverges from our optimistic expectations earlier in the year that called for a synchronized global economic expansion that we believed would lead to non-U.S. equities outperforming their U.S. counterparts. Although staggered recovery rates have led to moderate underperformance for developed non-U.S. equities this year, we believe better conditions may be on the way. The combination of extensive fiscal and monetary policy stimulus should soon give way to improved vaccination rates as the core driver of economic activity, similar to what we have observed in the U.S.

As has been the case in the U.S., non-U.S. equity returns should be helped by significant earnings growth, which aren’t expected to peak until the second half of 2021. In contrast, we expect U.S. earnings growth to decelerate through the back half of the year. This bodes well for non-U.S. stocks, especially in Europe, which is more cyclically oriented. More broadly, the MSCI EAFE Index has higher weightings in industrials, financials and materials, and is significantly underweight information technology, when compared to the S&P 500.

A variety of other market conditions support the thesis for stronger non-U.S. returns, including elevated interest rates in the U.S., relatively attractive valuations for developed international stocks and the weak state of the U.S. dollar, which could bolster returns in non-U.S. developed and emerging markets.

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Endnotes

Sources

All market data from Bloomberg, Morningstar and FactSet

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.

Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.

A word on risk 

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 investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income.

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