In any case, approximately half of the companies in the S&P 500 have experienced drops of 20 percent or more from their 52-week highs, and the list of worries we cited above could mean markets will remain messy and uneven.1 The initial catalyst for the current correction (a spike in bond yields) has faded, yet markets have been unable to find a floor.
At this point, we encourage investors to be patient and await improvements in sentiment. Markets may need to see firmer U.S. economic indicators or evidence of less political volatility in order to stabilize, but we believe we are near the end of the current corrective action.
The bottom line: economic and corporate fundamentals remain solid and earnings growth has been particularly strong in 2018 while prices have fallen. That means valuations are more attractive now than in January.
Over the next year, we expect a modest cooling in economic growth and a moderate upturn in inflation. We also think earnings are likely to come under more pressure than the consensus expects. That’s not a great recipe for equity market performance. But it also does not suggest the end of the bull market. We believe volatility will remain relatively elevated, while evidence points to higher equity prices over the coming year.
Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen Asset Management.
1 Source: FactSet, Bloomberg and Morningstar Direct
2 Source: Bureau of Economic Analysis
3 Source: Federal Reserve
4 Source: Strategas Research