4) Political uncertainty is unlikely to act as a sustained drag on stocks: The ongoing Robert Mueller investigation and revolving door of White House officials makes it seem that President Trump is surrounding himself with loyalists who may not provide unbiased advice. While these events add to political uncertainty, they shouldn’t affect market fundamentals. We expect any downside market reaction to be relatively limited.
5) Recent underperformance of mega-cap tech stocks does not mean the bull market is ending: Concerns are understandable, since this area of the market has been a stalwart leader for years. But we think this reflects growing divergence between areas of the market rather than a leading indicator for the market as a whole.
Caution Toward Stocks Is Warranted Until More Clarity Emerges
It is possible that we are wrong about any or all of the above points. Trade issues or other political issues could worsen, the Fed could make a policy mistake, economic growth could take a turn for the worse or the stock market could experience broader and more pronounced weakness.
We are mainly focusing on the issues of near-term changes in actual trade policy and the direction of interest rates. For the former, we expect cooler heads will prevail and at the worst we will see modest retaliatory trade actions from other countries. For the latter, we are somewhat reassured that bond yields have leveled off after a sharp spike in February.
Until more clarity emerges, we are approaching equity markets cautiously. We would not be surprised to see relatively high levels of volatility continue, and we may not be out of the woods with the current correction.
Longer-term, however, we retain a relatively optimistic view toward stock markets. We do not believe we are approaching an economic recession or an imminent equity bear market. We expect that, over time, stock prices will again be able to climb the wall of worry.
Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen Asset Management.
1 Source: Morningstar Direct, Bloomberg and FactSet.
2 Source: Geopolitical Futures, 22 March
3 Source: Commerce Department
4 Source: Institute for Supply Management