As recently as two weeks ago, investor sentiment was focused on the negatives. Global financial markets were bracing for another euro currency crisis, protectionism fears were rising, government bond yields headed sharply lower and financial stocks were hit hard. Sentiment has quickly recovered, however, as the eurozone appears to have stabilized and bond yields have increased. Some areas of the global economy appear to have lost some momentum, but financial markets have generally pivoted back to risk-on trends as equity prices have been rising.
Several risks and wildcards could trip up markets. Most of them, however, appear to be political and are unlikely to cause significant negative economic effects (with the notable exception of trade-related risks). Outside of politics, investors are closely watching Fed policy. The Fed is all but certain to raise rates again this week, but interest rates remain relatively low and we doubt a slow and steady increase is likely to derail the equity bull market.
Given an acceleration in U.S. economic growth and a positive corporate earnings environment, we continue to believe a pro-growth investment stance makes sense. We think the budding bear market in government bonds is likely to continue, while we expect equity prices will rise unevenly. In particular, we believe cyclical sectors are likely to do better than defensive areas.
At the same time, we think the advance in equities will narrow and volatility will climb as liquidity conditions tighten. Setbacks, corrections and periodic risk-off flare-ups are a normal part of equity bull markets, especially in the latter stages. Conditions may grow more uncertain in 2019 and beyond as yields continue to rise and if other central banks follow the Fed in raising interest rates. Nevertheless, we think equity markets have a path to move higher for now.
Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen Asset Management.
1 Source: Morningstar Direct, Bloomberg and FactSet
2 Source: Source: Federal Reserve
3 Source: Source: Crnerstone Macro, U.S. CapEx Report, 7 Jun 2018