Highlights

• Stock prices rose on solid economic data and expectations that trade issues should ease.

• We see downside risks coming from rising protectionism and economic weakness outside the United States, but expect stock prices to overcome these headwinds.

Global equity markets improved last week, thanks to solid economic data and signs that at least some areas of trade policy could be improving. Softer inflation data also helped, as it tamped down worries about an overly aggressive Federal Reserve. The S&P 500 Index rose 1.2 percent for the week, with the telecommunications, energy, technology, industrials, consumer discretionary and health care sectors all rising more than 1 percent.¹ The U.S. dollar declined last week, which boosted the beleaguered emerging markets.¹

Weekly Top Themes

1. Inflation is unlikely to move significantly higher. August data showed the core Consumer Price Index grew only 0.1 percent for the month, causing the year-over-year reading to slip from 2.4 percent to 2.2 percent.² At the same time, annualized headline inflation fell from 2.9 percent to 2.7 percent.² We believe price increases will remain contained, as inflation surveys show price pressures relatively modest and wages rising slowly.

2. Strong consumer sentiment suggests the economic expansion continues to have legs. The August University of Michigan’s Consumer Price Index jumped to its second-highest level since 2004.³ Sentiment improved across all income groups, with Americans as a whole expecting more jobs growth and better wages.³ The only notable negative was that consumers are growing increasingly concerned about rising trade tariffs.³ We believe modest wage improvements and relatively contained inflation will boost the consumer sector.

3. We expect jobs growth to continue. With the labor market tightening, we believe wage levels should continue to slowly improve, which should put additional pressure on the Fed to raise rates.

4. The next boost for equities will probably require easing trade tensions and improving global economic growth. Rising earnings have provided a strong tailwind for stock prices this year, but earnings are likely to moderate over the next 12 months.

5. The midterm elections are not likely to significantly affect the direction of the stock market. President Trump has taken a hard line toward trade issues and international relations in general. We do not expect that to change based on the outcome of the midterms, and doubt Democrats will be able to exert much influence over these matters even if they gain a majority in the House of Representatives. The good news could be that history suggests stocks may be poised for an increase regardless: The S&P 500 Index has not fallen in the 12 months following a midterm since 1946.⁴

Stocks Should Overcome Trade Issues As Well As Growth And Earnings Worries

Overall, we have a positive view toward U.S. stocks. We do think, however, that trade issues and concerns about non-U.S. economic growth will need to ease before equity prices can decisively move higher. Trade remains a significant wildcard, but we are optimistic that tensions will ease in the coming months. Talks on the NAFTA renegotiation seem to be moving in a positive direction. And despite periodic setbacks and the announcement of new tariffs, we remain convinced that the United States and China will be able to come to some agreement that will reduce uncertainty for consumers and businesses. These issues are unlikely to go away any time soon and remain a significant downside risk, but we expect this risk will ease over time.

Outside of the United States, the global economy appears to have downshifted. But we think the negatives are ending and momentum is bottoming. The eurozone appears to be stabilizing and we think China will experience a soft landing.

All of this suggests that the global economic backdrop will continue to support U.S. corporate earnings. Profits are likely to fall next year compared to 2018, as the effect of tax cuts wears off and companies face higher interest rates and the lingering impact of the rising U.S. dollar. But we think the effect of moderating profits has already been baked in to equity markets, meaning the decline shouldn’t disrupt stock prices. As long as the global economy does not experience a significant disruption, we think stock prices are likely to rise over the coming year.

Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen Asset Management.

 

1 Source: Morningstar Direct, Bloomberg and FactSet
2 Source: Department of Labor
3 Source: University of Michigan
4 Source: Srategas Research