At this point, the U.S. economy appears to be holding steady, despite downward pressures to manufacturing and trade. The labor market remains strong, which is supporting high consumer spending levels and promoting broader economic growth.
A closer look at the jobs market shows some companies (especially small businesses) struggling to find high-quality employees as the participation rate is rising, which could hamper productivity and profit margins.
However, we see no near-term catalysts for a recession, and expect the ongoing equity bull market to continue.
Equity Markets May Be Overdue For A Pullback
Throughout 2019, we were concerned that 2020 corporate earnings expectations may have been too high. Fourth quarter earnings reports have been fairly well received, thanks in large part to falling expectations at the end of last year and into 2020.
At the same time, forward guidance from corporate management teams has been cautious, further reducing expectations for 2020 results. In general, revenue growth has kept up with economic growth, but profit margins remain under modest pressure.
Despite solid longer-term prospects, we think the equity market is overdue for a pullback or consolidation phase. By our reckoning, technical conditions are stretched following the huge advance in prices over the past six months. And we also think current prices reflect improvements in economic growth and corporate earnings.
To experience an ongoing rally, stocks would require a stronger acceleration in the economy and corporate earnings than we think is likely. Thus, we expect markets will be choppy and uneven over the course of the coming year.
This creates a complicated environment for investors. Amid relatively high levels of uncertainty, most investors have been sticking with and doubling down on areas of the market that outperformed in 2019, such as U.S. growth stocks.
If and when the economy shows it is set to resume its acceleration, this relative performance is likely to shift, which could benefit value and cyclical areas. But the timing of such a move is highly uncertain.
Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen.