What Will Drive Stock Prices? The Answer Depends On The Time Frame.
In our experience, many different factors affect stock prices. Over the short term (weeks and months), technical factors and sentiment tend to drive returns. Over a one- or two-year time horizon, economic and business cycle developments have usually been the most important factors. And over the long term (five years and beyond), valuations have historically been the key determinant of prices.
Sometimes these three sets of factors align. At the start of the current bull market in March 2009, for example, sentiment had hit extreme lows, economic data was finally turning positive, the Federal Reserve launched its quantitative easing program and valuations had dropped to extraordinarily cheap levels.
Unfortunately, it looks more complicated today. From a technical perspective, prices appear to have gotten ahead of themselves. The cyclical outlook, however, still looks good given that economic and earnings growth continues to improve. And valuations appear full, although not excessive.
This complicates the outlook for stocks. Equity markets continue to look vulnerable to near-term corrective action, and the recent spike in bond yields proved to be a perfect catalyst for sparking a consolidation. Over the medium term, we think prices still have room to rise, but also expect increased volatility. And for the long term? Returns will probably be lackluster compared to the last decade, meaning investment selectivity should grow in importance.
Robert C. Doll is chief equity strategist at Nuveen Asset Management.
1 Source: Morningstar Direct, Bloomberg and FactSet.
2 Source: Bureau of Labor Statistics
3 Source: J.P. Morgan Research