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May 19, 2017
A brief dose of volatility hurts
U.S. equities
Brian Nick, Chief Investment Strategist, TIAA Investments
Article Highlights
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We expect oil prices to edge higher this year, supported by supply cuts, declining
U.S. inventories, and strong global demand.
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A late-week advance fails to offset the S&P 500’s worst day in eight months.
•
In overseas markets, European stocks benefit mightily from a falling U.S. dollar, while
another scandal rocks Brazil.
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U.S. Treasuries rally amid a rush into safe-haven assets.
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In a mostly positive week for U.S. data releases, we’re seeing evidence of better
second-quarter GDP growth.
Quote of the week
“I like to think of myself as an oilman. As an oilman, I hope that you'll forgive just good
old-fashioned plain speaking.”—Daniel Plainview, from the movie “There Will be Blood.”
The Lead Story: Black gold, Texas tease
Traders often cite rising oil prices as a key component of equity rallies. On May 15, for
example, the S&P 500 Index hit a fresh all-time high as oil prices jumped, thanks to
pledges by Russia and Saudi Arabia to cut output. However, history tells us that oil and
equities don’t mix—or at least they don’t usually move in the same direction. That’s partly
because the Energy sector has represented a small slice of the S&P 500 (just 7%, on
average, since 1986). Oil prices primarily reflect supply and demand for petroleum-based
products; stock market performance is based on corporate earnings, valuations, investor
sentiment, and interest rates, among other variables. And for most companies, higher oil
prices translate to higher input costs and lower profits.
There have been occasions, though, when the two have moved in tandem, particularly
during times of sharply rising or falling demand for oil. In an example of the former, the
West Texas Intermediate benchmark rose 70% from April 2009 to April 2010, reflecting
the global economy’s improved state. Concurrently, the S&P 500 began to recover from
its crisis lows, surging 54%. And in the latter case, U.S. equities and crude declined 13%
and 45%, respectively, from their November 2015 peaks to February 2016 troughs, amid
A brief dose of volatility hurts U.S. equities
concerns that a slowdown in China—with potentially negative consequences for growth
worldwide—would hurt demand for oil.
Over the past year or so, stocks and oil have gone their separate ways, a trend we
expect to continue. We also believe coordinated supply cuts from OPEC and non-OPEC
producers, along with decreasing U.S. inventories and stronger global demand, will push
crude prices higher over the balance of 2017. This should help extend Energy’s earnings
recovery, allowing the sector to rebound from its disappointing start to the year (-10.2%
vs. 6.5% for the S&P 500 as of May 18).
In other news: Political uncertainty weighs on equity markets
A sitting president denies allegations of wrongdoing. There are rumblings about
impeachment. Stocks and the currency tumble. Events in the U.S.? Well, yes—more
about that later—but here I’m referring to allegations that Brazilian President Michel
Temer authorized “hush money” to buy the silence of a witness in a corruption scandal.
Brazil's stock market, the Bovespa, plunged more than 10% immediately after opening on
May 18, halting trading. Brazil’s currency, the real, plummeted 7% against the dollar.
Both stocks and the real rose sharply the next day.
In the U.S., mounting political turmoil in Washington—specifically the new claims that
President Donald Trump attempted to interfere in an FBI investigation into former national
security adviser Michael Flynn—heightened concerns that the administration has lost the
political capital needed to push through its pro-business agenda. In response, on May 17
the dollar slid to a six-month low, and the S&P 500 lost 1.8%, its worst day in eight
months and the first time since March 21 that the index has fallen by 1% or more in a
single trading day. The index rebounded after the midweek stumble, offsetting most of
the decline.
Thanks to the dollar’s weakening versus the euro, Europe’s STOXX 600 Index fared far
better, rising 1.4% for the week (in U.S. dollars).
In U.S. fixed-income markets, demand for safe-haven assets supported a Treasury rally.
The yield on the bellwether 10-year note, which moves inversely to its price, fell 11 basis
points (0.11%) to 2.22% on May 17 before closing the week at 2.24%. Returns for nonTreasury sectors were broadly positive, with investment-grade corporate bonds
outperforming. Year-to-date through May 18, the asset class has returned over 3%, aided
by consistent fund flows.
Current updates to the week’s market results are available here.
Below the fold: The U.S. economy appears to be accelerating
In a mostly positive week for U.S. data releases, we’re seeing evidence of better secondquarter GDP growth, which we expect to hit 3.0%-3.5%, up from the first quarter’s 0.7%
gain. Among the reports:
A brief dose of volatility hurts U.S. equities
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The Conference Board’s index of leading economic indicators rose for the
fourth consecutive month in April, suggesting that the economy will rebound after
a disappointing first quarter.
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U.S. industrial output, a measure of output at factories, mines and utilities,
jumped in April to its fastest pace in more than three years. Capacity utilization,
which measures the extent to which businesses use their production potential, hit
a 20-month high. Taken together, these two reports point to a pickup in capital
expenditures in the second half of the year.
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Homebuilder confidence rebounded in May, with the NAHB/Wells Fargo index
hovering near March’s 12-year high. However, housing starts and building
permits, a forward-looking indicator, both fell in April.
In the Eurozone, the mood remains notably upbeat:
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Economic sentiment soared in May, according to the closely watched ZEW
survey.
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Consistent with the region’s improved outlook, inflation expectations have also
been rising. Final readings for April show that prices increased 1.9%—welcome
news for the European Central Bank as it aims to maintain inflation rates below,
but close to, 2% over the medium term.
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Germany’s economic mood brightened, too, confirming that the currency bloc’s
largest economy is in good shape.
The Back Page: OPEC, no longer prime at the pump
The announcement that the Saudis and Russians had agreed to extend oil output curbs
of 1.8 million barrels per day (m/b/d) drew some comparisons to OPEC’s cutting of 2
m/b/d to the U.S. during the 1973/74 oil embargo. However, the only real parallel is in the
sheer number of barrels removed from the market. In 1973, OPEC accounted for about
65% of U.S. crude oil imports. The reduction sent prices in the U.S. soaring, from $3.00
per barrel (p/b) to $12p/b in six months.
A brief dose of volatility hurts U.S. equities
While OPEC may have had the U.S. over a barrel, the crisis deepened the U.S.’ resolve
to achieve energy self-sufficiency, initiated with then-Secretary of State Henry Kissinger’s
“Project Independence,” unveiled during the heat of the crisis. Since then, the U.S. has
successfully pursued a path toward energy independence, while technology has led to a
proliferation of energy sources both in and outside of the U.S.
The U.S. still imports 40% of its oil from OPEC, which maintains a 42% market share of
global supply. As we approach next week’s OPEC policy meeting, expect the extension
of output cuts to buoy prices, but the effect of any curb will be a mere drop in the bucket
compared to its impact back in 1973.
This material is prepared by and represents the views of Brian Nick, and does not necessarily represent the views of TIAA Global
Asset Management, its affiliates, or other TIAA Global Asset Management 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 or sell securities, 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
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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.
Nuveen, LLC, formerly known as TIAA Global Asset Management, delivers the expertise of TIAA Investments and its independent
investment affiliates.
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