Stocks Can Still Climb, But Selectivity Is Key

The U.S. economy and U.S. stocks have both enjoyed surprising strength over the last decade. By keeping interest rates at record lows, the Federal Reserve and other central banks have been providing ongoing monetary support that has produced the longest economic expansion in history, even if the pace of growth has been relatively slow.

Global manufacturing and trade levels, however, have been lagging since the expansion began 10 years ago, and experienced significant slumps in 2011/2012 and 2014/2015. In both cases, strong consumer spending and a solid jobs market helped prevent the drop in manufacturing and trade from pulling the broader economy into recession. The U.S. has experienced a similar environment in 2019. While trade and manufacturing have been lagging, there is still some hope for a phase one U.S./China trade deal and global manufacturing levels appear to be stabilizing. We expect we are in the midst of another period when recession fears will successfully be staved off for now.

We are generally positive on the global economy. Stocks have been climbing as investors have been discounting recession fears. We have been arguing, however, that markets may be getting ahead of fundamentals. We do not expect a sharp pickup in economic or corporate earnings growth, and we are concerned that the broad market may be pricing in such an environment.

As such, we would say that we are only modestly constructive on equities heading into next year. This doesn’t mean, however, that we are not finding opportunities. While broad market U.S. indices have been setting records, parts of the global market remain behind their highs of 2018. Many countries outside of the U.S. – as well as U.S. areas such as small caps, financials and resource-related stocks – have yet to return as strongly, which suggests that value can still be found. In sum, this looks to be a stock-pickers environment where selectivity is key.

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


1 Source: Bloomberg, Morningstar Direct and FactSet
2 Source: Bureau of Labor Statistics
3 Source: Institute of Supply Management
4 Source: University of Michigan
5 Source: Markit Economics

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