9. The bull case for stocks: Despite these risks, massive monetary support will continue to support stock prices and we could still see some fiscal stimulus. These tailwinds should create buying opportunities during times of weakness until we see a vaccine, which should cause an economic resurgence.
10. Our view is somewhere in the middle: We think all of the bear and bull cases have some truth, which leads us to believe that stocks are likely to remain choppy and range-bound for the next several months.
The Economy Still Relies On Additional Fiscal Stimulus
Financial markets have been cooling off over the last month, with the correction in technology stocks spreading to the broader market. This shouldn’t be much of a surprise after an incredibly strong run in equities over the summer, driven by optimism over economic growth. We had been expecting a gradual and choppy economic recovery, but stocks were pricing in a much rosier outlook as recently as a month ago. Now, it looks like the odds of a quick return to pre-pandemic economic conditions are a longshot. The services sectors in particular appear likely to remain stagnant until people around the world agree it is again “safe” to return to normal, and without a substantive and proven medical breakthrough, it is hard to see that happening.
At this point, the momentum behind U.S. economic growth is waning. In particular, two key tailwinds driving growth in late spring into summer are fading: the benefits from reopening segments of the economy and the benefits from increased unemployment, jobs protection and business assistance. The former appears unlikely to continue without a proven vaccine and the latter is being held back by rising political uncertainty. There looks to be only a small chance of a fiscal stimulus program being enacted before the November election, and it might take a more painful market decline and economic pain to compel politicians to act. The bottom line is that until a medical breakthrough makes it possible for the economy to enter a self-reinforcing expansion, ongoing fiscal stimulus is still needed.
For stocks, short-term risks remain high and we think volatility is likely to continue. We expect stocks to continue clawing their way higher and being beset by periodic setbacks. Some of the froth has been removed from markets over the last month, and pockets of value are being created, but this remains a time for caution and investment selectivity.
Robert C. Doll is senior portfolio manager and chief equity strategist for Nuveen.
1 Source: Bloomberg, Morningstar and FactSet
2 Source: Empirical Research Partners