Outlook

• Economic and market environment: The global economy may have slowed, but we aren’t forecasting a recession.
 

• By the numbers: Stocks are up strongly in the first half of the year, but investors are focused on downside risks.
 

• Ten Predictions: At the halfway point of the year, most of our predictions are trending in the right direction.
 

• Outlook: With stocks fully valued, we think investors should focus on selectivity.
 

•  Key themes for investors: Investing is likely to be challenging from here. Remaining flexible will be critical.
 

Choppy And Frustrating, But No Recession
 

We based our 2019 predictions around the theme that markets and economic data would be choppy, but that we would avoid a recession or end to the bull market. While it is still early, most of our predictions are trending in the right direction.

Prediction 1: The U.S. expansion becomes the longest in history despite GDP slowing to a still-above-trend increase of 2% to 2.5%.​

We don’t have final second quarter growth numbers yet, but as of the end of the quarter, this current expansion has become the longest in U.S. history.¹ The U.S. economy appears to be in a bit of a weak patch, but we remain confident that overall 2019 gross domestic product will grow over 2% for the year.​

 

Prediction 2: Unemployment bottoms in 2019 while wage growth continues to rise.​

Unemployment has fallen to 3.6% and continues to hover around that level.² We think unemployment is likely to bottom this year. While wage growth has been increasing at a slower pace than we expected this year, it is trending higher.

 

Prediction 3: The Treasury yield curve flattens and credit spreads widen due to late cycle concerns.​

The yield curve inverted several times in 2019 and credit spreads tightened at the start of the year before widening over the last couple of months. For the year, the spread between the 2- and 10-year segments of the Treasury yield curve widened from 19 to 25 basis points.³ And the spread between the 10-year Treasury and AAA-rated bonds has tightened by 42 basis points.³ We think fixed income market volatility will persist, making the outcome of this prediction highly uncertain.

 

Prediction 4: Corporate earnings growth estimates weaken for 2019 and 2020 as both revenue and profit pressures rise.

Both revenues and profits have come under pressure this year, and as a result, earnings growth expectations for 2019 and 2020 have fallen close to 6% compared to where they were at the start of the year.³ At this point, we think 2019 estimates have come down to reasonable levels, but we think 2020 expectations still appear too high and may fall more.

 

Prediction 5: U.S. equities experience a positive return, but fail to reach record highs for the first time in 10 years.

Stocks are comfortably up in double digits this year, as the S&P 500 Index has climbed 18.5%.³ The end of the second quarter marks the fourth time that index has been trading in the 2,950 range over the past 18 months (after previously reaching this level in January 2018, September 2018 and May 2019).³ That means stocks really haven’t gone anywhere in a year-and-a-half.​

 

Prediction 6: Non-U.S. stocks outperform U.S. stocks as the dollar sags.​

Coming into the year, we expected non-U.S. economic growth to pick up more than it has relative to the U.S. economy. But U.S. growth still remains stronger, and the S&P 500 Index (up 18.5%) is ahead of the MSCI World Index ex-U.S. (up 15.1%).³ The dollar has also been stronger than expected, although if the Federal Reserve does cut rates, the value of the dollar will likely fall.​

 

Prediction 7: The information technology, financial and health care sectors outperform utilities, REITs and materials.​

We’re even on this prediction so far. Surprisingly, health care stocks have been held back by political concerns over possible regulations, while utilities have done well since all interest-rate sensitive areas of the market have outperformed as yields have been falling.³ To date, a basket of our favored sectors and less-favored are actually both up 17.5%.³

 

Prediction 8: The annual federal budget deficit approaches $1 trillion, a level unprecedented absent a recession.​

Tax cuts have added to the deficit, and neither political party is showing any interest in reining in federal spending. As of the latest projections in May, the forecast from the Congressional Budget Office for the 2019 fiscal year deficit was closing in on $900 billion, a staggering amount for a country not in recession.

 

Prediction 9: U.S. and global politics spark more market volatility as the cold wars within the U.S. and with China persist.​

Overall market volatility has been rising this year. Although trade issues have been dominating the headlines, other issues such as U.S./Iran tensions and growing political and social discord within the U.S. have also been causing concerns. Judging how these issues might influence economies and financial markets is complicated, but they are unlikely to be positive.​

 

Prediction 10: A double-digit number of Democrats run for president while President Trump is challenged within his own party.​

Amazingly, this came to pass early in the year as well over 20 Democrats announced their candidacy. Former Massachusetts governor Bill Weld also announced his candidacy for the GOP nomination, and while his chances appear slim at best, it is a sign of some fracturing between the president and the rest of the Republican Party.​

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

1 Evercore ISI
2 Bureau of Labor Statistics
3 Bloomberg, FactSet and Morningstar Direct