A number of catalysts could trigger such an event. Economic data has almost continuously surprised to the upside, and a string of disappointments could trigger a change in sentiment. Additionally, investors could become more impatient or less optimistic about the prospects for pro-growth legislation from Washington. Investors also seem complacent about Fed rate hikes, especially the possibility that the Fed could become more aggressive should economic and inflation data continue to move higher. Slowing Chinese growth could present risks, as could a flare-up in one of many geopolitical hot spots. Should any of these events happen in isolation, it probably wouldn’t surprise investors, but multiple simultaneous occurrences could trigger a risk-off phase.
We think it makes sense to approach equity markets cautiously in the near term, but at the same time, the 6- to 12-month outlook appears moderately constructive. Improving economic growth, rising corporate earnings and the likelihood of rising interest rates make stocks look more attractive than bonds. Investors may need to weather some additional near-term volatility, but we continue to believe that overweight positions in equities makes sense for the long term.
Bob Doll is chief equity strategist at Nuveen Asset Management.
1 Source: Morningstar Direct and Bloomberg, as of 3/17/17
2 Source: Congressional Joint Committee on Taxatation