Stocks May Be In For A Prolonged Period Of Churning And Volatility
Policymakers have decided to reopen economies despite ongoing virus risks, as the damage from shutdowns risked becoming permanent. At this point, most of the world’s major economies are running at various speeds and the bars for enacting new economic lockdowns appear increasingly high. Looking ahead, we think the global economy will slowly improve, but at a modest and uneven pace after the initial reopening bounce. Corporations will be cautious about risk taking and demand levels will be uncertain given the unknowns around the outlook for infection rates. It is also unclear how serious economic headwinds could become if we see significant virus spikes later this year. Successful treatments and/or a vaccine are still needed to provide that clarity.

From an investment perspective, financial markets appear to have gotten ahead of themselves since the lows of late March. Massive monetary and fiscal stimulus measures have been a significant positive, but we were growing increasingly concerned that stock prices reflected unrealistic economic and earnings growth prospects, especially as we do not expect earnings to return to pre-coronavirus levels any time soon. Global equities (especially in the U.S.) appear to have reached overbought levels, and last week’s decline looks to be the start of a corrective or at least churning phase.

Looking back on our list of positives and negatives, the good news is that the positives represent longer-term trends, but the bad news is the negatives could dominate for the time being. More clarity around the severity of the coronavirus itself or news about treatments and vaccines would go a long way toward removing near-term uncertainty. We also think investors should keep a close eye on political risks, including a possible rise in protectionism.

Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen.

1 Source: Bloomberg, Morningstar and FactSet

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