5. Democratic Party prospects for the midterms appear to be improving. We still believe Republicans will keep control of the House of Representatives, but will likely lose the Senate. However, a full Democratic sweep of Congress is increasingly looking like a possibility. Should that happen, we could see a tighter regulatory environment and a rollback of recent tax cuts that could negatively affect equity markets. We also could see more of a push for populist policies such as a higher minimum wage, drug price controls and additional protectionist trade practices.
We Expect Turkish Currency Woes To Remain Contained
The Turkish currency collapse came at a particularly bad time, since emerging market equities and currency markets were already under pressure. The European banking sector has also been struggling, following political tensions in Italy and general worries over the state of the European economy. Although downside risks exist, we do not anticipate seeing anything close to the 1997-1998 Asian currency crisis or a replay of the Greece meltdown from earlier this decade. The damage to investor sentiment, however, has pushed more investors into the relative safety of U.S. equities and is putting more upward pressure on the value of the U.S. dollar. We expect these trends to continue until the global economy demonstrates further resilience, and perhaps until we see more easing in trade tensions.
A Solid Global Economy Should Provide Resilience For Equities
Despite events such as the Turkish currency collapse and ongoing trade issues, the global economy has remained relatively resilient. Signs of localized weakness and trade risks have kept a lid on government bond yields and have prevented central banks from moving too far from accommodative monetary policies. Global equities have been trading mostly sideways for months, ever since the winter spike in government bond yields.
We have, however, seen a widening divergence between the United States and the rest of the world. U.S. stock prices have been flirting with new highs, while most other global markets have been flat to lower.1 The United States remains in a “risk-on” mode while the rest of the world is seeing worsening sentiment.
We do not expect this divergence to persist for too much longer and believe the forces causing weakening sentiment will eventually dissipate. The global economy is more structurally sound than it was five or 10 years ago (particularly in the United States and Europe). As such, we think the world economy can better withstand periodic and localized setbacks. Trade issues remain a big wildcard. While we see notable risks from rising trade tensions, we do not believe they will spill over into a recession. We think the global economy will more likely continue to accelerate, which should put additional upward pressure on both global equity prices and on global bond yields.
Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen Asset Management.
1 Source: Morningstar Direct, Bloomberg and FactSet
2 Source: Empirical Research Partners