3. The current economic expansion should remain on track. While this economic cycle is a long one, we see no signs of it ending. Before that happens, we think we would need to see some combination of average hourly earnings accelerating to 3% to 4%, the GDP price deflator rise to more than 2.5%, corporate operating rates climb more than 80% or the Treasury yield curve become inverted. We are not close to any of these points yet.
Volatility May Rise, But Equities Still Look Attractive
Historically, October has often been associated with negative surprises for investors. The major stock market crashes in 1929 and 1987 come to mind, as does the Asian currency crisis in 1998. We see almost no likelihood of a similar event happening any time soon, but we do think that volatility levels are likely to pick up in the coming months. Global political events (including the upcoming election in Japan, tax debates in the U.S. and ongoing tensions in North Korea) could rattle markets, as could ongoing Federal Reserve tightening and a possible uptick in inflation.
After Treasury yields fell to new 2017 lows last month, bond markets have been faltering in recent weeks with the yield on the 10-year Treasury rising 25 basis points.1 As investor expectations for Fed tightening and improving economic growth solidify, we believe yields will experience additional upward pressure. There may be a technical barrier to high yields around the 2.5% level for the 10-year Treasury. But if yields break through that level in the coming months, they could move more quickly to 3%.
The same factors putting upward pressures on yields are also acting as tailwinds for stock prices. We don’t expect prices to rise evenly, but we believe equities are more likely than not to outperform bonds over the coming year.
Bob Doll is chief equity strategist at Nuveen Asset Management.
1 Source: Morningstar Direct, as of 9/29/17
2 Source: Bureau of Economic Analysis