Key Points

• Global monetary policy experiences renewed focus as fears grow over a potential renewed tightening phase. In our view, monetary policy remains supportive of risk assets.
• We believe U.S. and global economic growth should improve modestly over the coming year, which would be a positive for corporate earnings and equity prices.

U.S. equities experienced a volatile week, as monetary policy dominated the headlines. Dovish comments from Federal Reserve officials tamped down speculation that the central bank was on course to tighten aggressively. Investors are also closely watching any movement by the Bank of Japan to spark economic growth. Weaker economic growth data and rising U.S. political uncertainty were also factors last week. For the week, the S&P 500 Index gained 0.6%, as technology outperformed and financials and energy lagged.1

Weekly Top Themes

1. The strong patch of summer U.S. economic data may have ended. Following weak Institute for Supply Management readings in previous weeks, August retail sales declined 0.3%.2 This marks the first pullback since March,2 and bears watching for a broader downtrend into September.

2. The recent advance in bond yields may act as a headwind for equities. Sovereign yields have been advancing since July, but have only recently negatively affected equity markets. We don’t believe the increase will depress stock prices, but it may limit upside potential.

3. Corporate earnings expectations are climbing slowly. Following a modest second quarter improvement, analyst expectations for future quarters have climbed in recent weeks.3 The largest increases are in the technology, health care and consumer discretionary sectors.3

4. Equities may continue to climb in 2016, based on historical trends. Strategy group Fundstrat shows that since 1940, when stock prices increased more than 5% by mid-September, 87% of the time they rallied further in the last three-and-a-half months of the year.4 As of Friday’s close on September 16, the S&P 500 Index is up 6.3%.1

5. Equity gains may be tough to come by, suggesting this remains a stock-picker’s market. In our view, the risk-reward trade-off for stocks is mediocre based on current valuations. Yet, equities remain relatively attractive with bonds appearing overvalued and cash returning close to zero. We believe selectivity will continue to be critical, making an implicit argument for active management.

Economic Growth and Policy Remain Equity Friendly

We believe global economic growth should continue improving modestly over the coming year. The United States will likely remain the primary growth engine, and it is reassuring that employment trends have remained solid despite many global headwinds. We believe income levels and consumer spending are likely to pick up in the coming quarters, which should help retail sales. Manufacturing has been uneven and global trade has struggled during this economic cycle, but we think employment and demand trends point to an eventual improvement in both areas. Outside of the U.S., the eurozone appears to have navigated the Brexit fallout without significant damage, while China’s economy has remained relatively resilient. This backdrop should be a positive for corporate earnings, and ultimately equity markets.

Global monetary policy has come into renewed focus in recent weeks. Some investors fear the world is entering a renewed tightening phase due to the European Central Bank’s decision not to expand its bond-buying program, confusion over Bank of Japan policy and the prospects for Fed rate hikes. In our view, worries are premature that the ECB and BOJ will not provide additional support. And even as the Fed considers raising rates, it remains focused on supporting economic growth and should do so slowly. Overall, monetary policy appears supportive of risk assets.

As such, we believe it makes sense to retain a mildly pro-growth, pro-risk investment stance. A number of risks exist, and the U.S. elections are currently in focus. The odds of a Clinton victory have fallen slightly in recent weeks. Prospects for a Trump victory have unsettled markets, given the uncertainty surrounding his economic policies. Investors are also worried about a sharper spike in bond yields. We would not ignore any of the risks, but still believe that equities appear more attractive than bonds or cash.

1 Source: Morningstar Direct, as of 9/16/16
2 Source: Commerce Department
3 Source: RBC Capital Markets
4 Source: Fundstrat

Bob Doll is chief equity strategist at Nuveen Asset Management.