Risks To Our Outlook
The future of additional fiscal stimulus is uncertain in the Senate, where moderates have pushed for a narrower bill. Additional risks include uncertainty about potential tax increases and the unresolved debt ceiling.
Outside of the U.S., concerns about China were highlighted last week by plans to propose new rules that would ban companies with large amounts of sensitive consumer data from going public in the U.S.
We continue to expect supply chain disruptions, slowed production and persistently high inflation prints (e.g., ocean freight prices) due to struggles containing the Delta variant.
Equity markets remain susceptible to volatility and pullbacks, and may react negatively to economic data that misses consensus expectations.
Despite these challenges, we think that global equity markets will again prove resilient, as underlying fundamentals remain strong.
Best Ideas
Discounted valuations and stronger relative earnings growth in developed non-U.S. markets, particularly in Europe, will be the catalyst for select stocks in cyclically oriented sectors to outperform. We remain broadly bullish on emerging markets, although guarded with respect to Chinese equities. Further upside in the U.S. as we move toward 2022 will be driven by high single-digit earnings growth with the potential for positive revisions. Continued overall strength in underlying economic data should lead cyclical sectors, such as industrials and small caps to outperformance.
In Focus: What Follows Fed Tapering Is The Real Question
The Federal Reserve initiated quantitative easing (QE) program last year in response to an acute liquidity shortage amid the Covid-19 outbreak. The program will begin to wind down in the next several months and conclude by the second half of 2022.
Unlike the previous QE tapering in 2014, this wind down hasn’t fueled a “taper tantrum” of sharply higher interest rates. Instead, investors have greeted the inevitable with a shrug: long-term rates are down notably from their March peaks, and equity indexes continue to hit new highs.
While the scale of QE has been large ($120 billion/month in asset purchases), fiscal stimulus and vaccines have been the main drivers of the economy this year. Still, QE has been a reassuring safety net, helping ease market volatility. Such comfort may cease if investors develop vertigo as they ponder the Fed’s next agenda item: increasing short-term policy rates. The good news? Rate hikes likely won’t start until late 2022/early 2023 and should be gentle.
Even so, the macro backdrop is turning a bit less friendly for stocks. Growth is slowing (albeit from a high peak), and monetary and fiscal policy tailwinds are fading. The relevant takeaway from the last Fed taper wasn’t the tantrum itself, but the investment environment that followed — one of lower market returns, higher real interest rates and mixed sector performance. All of these conditions favor active management.
Saira Malik is head of global equities at Nuveen.