Key Points

  • The July jobs report was stronger than expected, but overall U.S. and global economic growth remain modest.
  • A continued advance in equity prices will likely require improvements in corporate earnings, an ongoing recovery in Europe and greater stability in oil prices.
  • There were a number of events for markets to react to last week, including decisions by the Bank of England and Bank of Japan to enact new stimulus programs, sharp polling shifts in the U.S. presidential election and further decent corporate earnings results. U.S. stocks rose last week, with the S&P 500 Index climbing 0.5%.1 The technology sector saw particularly impressive earnings results and climbed 1.5%. In contrast, most other markets around the world were flat or down.

Weekly Top Themes

July’s jobs report confirmed that U.S. economic growth remains on track. 255,000 new jobs were created last month, the unemployment rate remained at 4.9% and average hourly earnings climbed 0.3%.2 These stronger-than-expected results raise the chances of a Fed rate hike before year end.

Long-term U.S. growth has been lackluster and will likely remain so. Since the start of the recovery seven years ago, real gross domestic product growth has averaged just over 2%.3 Tailwinds such as the improving labor market and low mortgage rates have been counteracted by headwinds such as low business confidence. We expect these crosscurrents will persist.

Nominal growth has been particularly weak this cycle. Compared to previous expansions, nominal growth (which includes the effects of inflation) has been extremely low.3 Since nominal growth is determined by both unit growth and pricing power, this trend has been a primary culprit behind recent weakness in corporate earnings.

Increases in government spending are a mixed bag for the economy. After several years of a sequester-enforced decline in spending, government spending has increased in 2016.4 While this boosts economic growth, additional regulations and increased control of private resources through stringent health insurance rules limit the economy’s ability to promote higher standards of living.

China’s economy is slowing, but the rate should be manageable. Fears of a Chinese hard landing have been a persistent worry for investors. Chinese authorities have been slowly shifting the country’s economy away from exports and investment spending and toward domestic consumption. We believe Chinese growth is slowing from the officially reported 10% level of a few years ago toward something closer to a more-sustainable 5% by the end of this decade.5

Despite Risks, the Global Economy Remains Resilient

Since the current economic recovery began, investors have contended with a number of economic issues. The most recent risk has been the extent to which the Brexit vote might trigger widespread contagion. So far, it appears that outside of slowing growth in the United Kingdom, effects have been limited. Investor worries are now focused on Italy’s banking and political systems. Italian banks are struggling with a rash of bad loans on their balance sheets and thin capital buffers. This storm has been brewing for some time, and coincides with the upcoming constitutional referendum that could reshape Italy’s political system. Investors are rightfully viewing the turmoil with caution.

In addition, many are questioning the overall state of the world economy in light of rising geopolitical instability, consternation over the upcoming U.S. elections, questions about global monetary policy, relatively low business confidence and a renewed slump in oil prices. Yet, we believe the global economy has been, and should continue to be, resilient in the face of all of these risks. We believe global monetary policy remains supportive of growth and the global recovery will continue, especially in the United States.

In this sort of environment, we continue to prefer equities over bonds and believe that 2016 will mark the fifth consecutive year in which U.S. stocks outperform U.S. bonds.1 Neither asset class is cheap, but we believe equities appear more attractive on a relative basis. For stock prices to continue to climb, we believe we will need to see better corporate earnings results, evidence that the European economy will continue to recover and more stability in oil prices. We think there is a reasonable chance that all of these themes will emerge.

Bob Doll is chief equity strategist at Nuveen Asset Management.