Highlights

• While U.S. growth appears mediocre, it looks stronger than other areas of the world.

• Impeachment proceedings will probably add to uncertainty and bog down an already dysfunctional Washington.

• We are broadly neutral toward stocks and think upside and downside risks appear balanced.

U.S. stocks struggled for a second straight week, with the S&P 500 Index falling 1%.¹ More defensive areas such as utilities, REITs and consumer staples outperformed, while health care, energy and communications services lagged.¹ Mixed economic data was pushed to the sidelines by the news that the House of Representatives launched a formal impeachment process against President Trump.

Weekly Top Themes

1. U.S. economic data shows signs of improvement, but we think the economy will remain mediocre. This trend was reflected in the September U.S. flash manufacturing purchasing managers’ index, which rose to a better-than-expected, but still-modest, 51.0 from 50.3 in August.²

2. On the other hand, European growth is struggling. Manufacturing trends remain a key indicator as the European composite PMI fell from 51.9 to 50.4 in September and the German manufacturing PMI was down to 41.4, marking its weakest level in more than a decade.²

3. Weak confidence levels and trade uncertainty are holding back the global economy. Major economies around the world are adopting stimulative monetary and fiscal policies, which are helping to prolong the expansion. But we find it hard to make a case for more robust growth levels, absent easing trade tensions and a move toward more certainty.

4. Debate continues over where the U.S. falls in the economic cycle but the world is clearly in the latter stages. For one, corporate profits as a share of gross domestic product peaked a couple of years ago, which is a classic sign that the cycle is drawing to a close.¹ Additionally, both businesses and consumers seem more optimistic about today compared to where they will be in the future.

5. Impeachment proceedings will likely add to uncertainty and impede any possible legislative progress. We think impeachment is likely to be a negative on consumer and business confidence. Additionally, the chances of legislation around trade, pharmaceutical pricing or budget agreements have probably moved lower.

What It Would Take To Adopt A “Non-Neutral” View Toward Stocks?

Financial markets have been flipping quickly between risk-on and risk-off indicators. A couple of weeks ago, for example, investors were focused on oil supply disruptions and spiking prices, but oil has returned to levels seen before the recent attacks in Saudi Arabia.¹ Likewise, some indicators alarmingly pointed to a sharp drop in consumer confidence earlier this week, but those factors quickly faded as well. Overall, we think this instability and uncertainty reflects sluggish global growth as well as trade and monetary policy uncertainty.

Against this backdrop, global bond yields have fallen to near-historic lows and caused stock prices to trade in a broad trading range. Looking ahead, we don’t see signs that the U.S. or other major world economies are heading toward recession, but we don’t see signs of a sharp economic breakout to the upside either.

From a financial markets perspective, bond yields have moved higher since August, but still appear priced for a worse economic environment than we expect. As such, we wouldn’t be surprised to see additional near-term upward pressure on yields. For stocks, we think risks appear roughly balanced and expect the broad trading range to continue.

What would it take for equities to break out of the range? On the downside, signs that the consumer sector is joining the manufacturing sector as an economic drag would make us more bearish. On the positive side, receding political risks, signs of a substantive trade deal or a recovery in manufacturing would make us more bullish. We don’t see either outcome as particularly likely in the short-term, but if we were forced to choose a side, we would lean more toward the positive.

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

 

¹ Source: FactSet, Morningstar Direct and Bloomberg
² Source: IHS Markit