9. The debate between value cyclical and growth momentum stocks continued. Value cyclicals have outperformed with support coming from outsized positioning, valuation dispersion, momentum in leverage-to-macro and earnings-revision, inflation expectations and vaccine progress. Growth momentum, the big standout during the market rebound and years prior, remains leveraged to bank liquidity tailwinds, long duration and secular growth themes.
10. The equity-market rotation has been buoyed by continued strong monetary support, acceptable economic and earnings news and hopes for a vaccine. Defensive, low beta, big, U.S. and growth stocks have generally ceded leadership to cyclical, high beta, small, international and value stocks. This rotation has been accompanied by a lower dollar and higher commodity prices and depends on Washington passing another fiscal package.
The Short-Term Outlook Warrants Caution
The continuing global economic recovery will be bumpier than what the markets reflect, so investors should be selective in their exposure to risk assets. The reacceleration in U.S. infections has triggered renewed restrictions in economic activity. While smaller, similar episodes have erupted around the globe, the U.S. carries additional risks: the stalled fiscal stimulus bill, uncertainty around the election, elevated valuations and uncertain future corporate profits. We are cautious on the short-term outlook, but expect some turbulence as the V-shaped economic rebound gives way to a more choppy recovery.
Investors have taken disappointing developments in stride, but stretched technicals and valuations imply vulnerabilities. On the positive side, central bank policy has successfully shored up credit markets. Narrowing U.S. high yield corporate bond spreads are only modestly above January levels, which is impressive relative to the implosion in corporate cash flows and the likelihood of a choppy recovery. Still, some profit taking is likely after the huge rebound since March 23. For example, gold fell last week.
The monetary and fiscal reflationary bridge must hold until a medical breakthrough occurs, otherwise the global economic recovery could falter. We doubt that such a breakdown will occur, but Congress is playing a perilous game. While we expect an agreement on a new fiscal package, the question is whether the financial markets need to correct first, pushing the two political parties to come together.
Corporate profits must steadily recover to sustain the equity rally beyond any near-term setbacks. The longer it takes to return to more normal economic and social activity, the greater the odds of permanently losing capacity, employment and profitability. We are generally constructive on the prospects for an economic and earnings recovery, but near-term disappointment is possible.
Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen.
1 Source: Bloomberg, Morningstar and FactSet
2 Source: Bureau of Labor Statistics