Key Points

Equities rose again, and U.S. markets are up close to 8% since the February 11 low.

We believe the global economy continues to heal, which should help equities over time.

For recent market improvements to continue, further oil price stability and more monetary policy clarity may be necessary.

U.S. equities climbed for a second straight week, with the S&P 500 Index rising 1.6%.1 Investors took solace in a renewed climb in oil prices and a sense that the United States was unlikely to enter a recession.

Have Conditions Improved?

Since the market low on February 11, the S&P 500 Index has climbed close to 8%.1 Much of the bounce can be attributed to a recovery from oversold lows, but we have also seen the start of some fundamental shifts. Oil prices have risen as a result of actual and prospective production cuts. Economic data have improved, especially in the jobs market. And fears over the possibility of a negative interest rate campaign have faded. Nevertheless, pessimism remains high and investors are wary. This year will likely continue to frustrate both the bulls and the bears. The bulls were frustrated early in the year and now it appears to be the bears’ turn. We expect this sort of volatility and back and forth may persist for some time.

Weekly Top Themes

1. Fourth quarter gross domestic product growth was revised higher. The revision showed the economy grew at 1.0% versus the 0.7% previously reported.2 Much of the improvement was a result of a stronger buildup in inventories, which helps explain why manufacturing has been so weak this year.

2. Reductions in oil production should help put a floor in prices. While production freezes from OPEC and Russia would barely put a dent in the supply glut, they should limit further price downside. This should help take some of the fear and risk out of the global financial system.

3. Corporate weakness remains concentrated in energy companies. A survey of planned capital expenditures showed a likely decline of 5% for 2016.3 Energy companies showed a 27% decrease, which means ex-energy capex would be up 4%.3 Technology reported particular strength with a planned 17% increase.

4. The rally in cyclical stocks suggests improvements in the global economy. Cyclical areas of the market have led the recent rally.1 If the global economy were sliding into recession, this likely wouldn’t be the case. Additionally, we think the rally suggests the U.S. dollar may have limited additional upside.

5. Near-term fiscal stimulus or tax reform is unlikely. With monetary policy less stimulative, attention is turning to the prospects of fiscal or tax reform. Given the 2016 elections, we doubt we will see progress this year, but ongoing conversations about corporate tax reform may set the stage for action in 2017.

Factors That Might Cause the Equity Advance To Continue

Since the end of the Great Recession, we have witnessed a seemingly never-ending list of worries that could drag the world back into deflation. Slow global growth, structural weakness in commodity prices and debt issues have kept these fears alive. Although global economic growth has improved in recent years (especially in the U.S.), pessimism has kept equity and corporate bond markets on the defensive, and government bond yields remain extremely low.

More recently, markets have stabilized and equities have recovered. Cornerstone Macro recently listed the factors required for these improvements to continue:4 (1) oil prices need to stabilize further to alleviate growth and currency concerns, (2) global financial conditions must not tighten further, meaning the rise in the U.S. dollar will have to slow while global central banks should continue to promote growth, (3) the Fed will have to confirm it is adopting a more dovish outlook and slow the pace of rate increases (the March policy meeting will be critical to watch for signs this may happen), (4) China’s financial and currency trajectory will need to become more clear, and finally, (5) we need evidence that the world’s developed economies will adopt pro-growth policies and not engage in currency wars (this week’s G20 meeting will be telling).

We think all of these events have a reasonable chance of happening, which underlies our modestly optimistic outlook. Over time, global economic growth should improve, and we expect to see a rebound in manufacturing levels. We do not expect sharp and sustained advances in risk assets, but we do think equity prices should slowly and unevenly move higher over the next year.

Bob Doll is senior portfolio manager and chief equity strategist at Nuveen Asset Management.