Key Points

• U.S. economic data has been mixed in recent weeks, but we expect growth will improve.
• The passage of health care reform in the House has both positive and negative implications for tax reform.
• Gains may be tough to come by, but we believe equities will outperform bonds over the next 6 to 12 months.

Market volatility has been extremely low lately. Last Thursday marked seven consecutive trading days in which the S&P 500 Index moved less than 0.2%, while the index was up a modest 0.7% for the week.1 In other asset classes, Treasury yields rose, the dollar fell for the fourth week in a row and gold and oil prices fell sharply.

Weekly Top Themes

1. Economic data offers compelling arguments on both sides of the debate. Bears point to weak auto sales, a disappointing first quarter gross domestic product report and a slow-moving legislative agenda. Bulls are focusing on rising capital spending and new orders levels, improving bank lending and strong jobs growth.
2. Improving jobs growth makes it likely that the Federal Reserve will raise rates next month. The robust 211,000 jobs created in April and drop in unemployment to a 10-year low of 4.4% suggest that weaker March numbers were likely a weather-related blip.2
3. We expect economic growth to rebound in the second quarter. The ISM non-manufacturing index for April surprised to the upside, hitting 57.5 and erasing nearly all of March’s decline.3
4. Manufacturing may be peaking. Purchasing Manager Indexes around the world are still generally above 50 (meaning manufacturing is still expanding), but have been trending lower, suggesting the pace of growth is slowing.4
5. Corporate earnings are looking solid. With more than 80% of companies reporting first quarter results, earnings are beating expectations by an average of 6%.5 Revenues are on track to rise 7%, with earnings-per-share up 15%.5
6. The passage of the American Health Care Act in the House of Representatives is both good and bad news for tax reform. It shows Republicans are capable of coming together on complex legislation, but it means the health care debate will likely to go on for some time and tax legislation will be pushed back.
7. We expect European equities to continue performing well. U.S. equities have long outperformed European stock markets, but that trend has not carried over into this year.1
8. Oil price volatility will likely continue. Technological revolutions in the energy sector have upended assumptions about the connection between oil production and price. The world is also facing widespread overproduction and uncertain future demand. Many oil producers are attempting to stabilize prices by reducing inventories. All of these factors should contribute to ongoing volatility.
9. Global populism and nationalism will likely persist as long-term political trends. Income inequality, aging populations and shifting demographics, globalization, automation, high debt levels and low productivity are exerting political pressure around the world.
10. Active equity managers have improved performance over the past year. In April, 63% of U.S. large cap equity managers outperformed their benchmarks. And more than half have outperformed in 9 out of the last 13 months.6

Equities Look Attractive, But Returns May Be Limited

Investors may be suffering from political overload and fatigue, but political issues show no signs of fading. Uncertainty in the United States and Europe and tensions in the Middle East and Asia have the potential to rattle financial markets. On the upside, the global economy appears to be on sounder footing than it has been in many years. The global economy is hardly robust, but deflation and recession risks have faded and we expect the global economy to gain traction in the months ahead.

From an investment perspective, we think the equity market consolidation of the last couple of months may persist for a while. But we believe stock prices will eventually begin moving higher and should outperform bonds over the next 6 to 12 months. Returns are likely to be lower for risk assets than over the last several years. Central banks are becoming less accomodative and the era of expansive liquidity is ending. We think gains will be tougher to come by, suggesting that security selection and active management will become more important tools for investors.

Bob Doll is chief equity strategist at Nuveen Asset Management.

1 Source: Morningstar Direct, as of 5/5/17
2 Source: Bureau of Economic Analysis
3 Source: Instituite for Supply Management
4 Source: Markit Economics
5 Source: RBC Capital Research
6 Source: Bank of America Merrill Lynch