7) Inflation appears to be slowly moving higher, which may add to market volatility. Last week’s employment data showed wage growth rose to a 2.7 percent year-over-year level.3 Consumer price and producer price data released this week will be closely watched for signs of inflation acceleration. We think inflation is moving from “very low” to “low” and shouldn’t yet be problematic. But rising inflation may create a headwind for equity valuations.
8) We think stocks are in the midst of a consolidation and correction, but not nearing the end of the bull market. Economic and corporate fundamentals remain decent, which leads us to believe that the bull market should continue. Additionally, the stress in the equity markets has not been echoed in credit markets, and volatility remains relatively low in other asset classes. This is a positive sign that may indicate stocks are in the midst of a regular bull market correction rather than something more serious.
9) The presidential four-year cycle suggests volatility could remain elevated, but also points to a possible silver lining. History is an imperfect guide, but cyclical trends can be instructive. Midterm election years have historically been the most volatile of the four-year presidential cycle.5 Since 1962, midterm years have seen an average peak-to-trough decline of 18 percent for the S&P 500 Index.5 In addition, these declines have historically represented strong buying opportunities. On average, from the low points during midterm years, the S&P 500 Index climbed 36 percent over the following 12 months.5
10) Near term, we think it will pay to be cautious and tactical in this environment. Since late January, stock prices have remained in a broad trading range of between 2,875 and 2,532 for the S&P 500 Index.1 We think this trend will continue, and those levels may represent the high and low for several months and possibly for all of 2018.
As such, we think investors should approach markets with caution, but also be tactical: We think investors should look for opportunities to add to positions on weakness. And given that markets are near the low end of their trading range, now might be such a time. Additionally, we think it makes sense to take profits during times of strength. Over the longer term, we continue to have an optimistic view toward equities.
Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen Asset Management.
1 Source: Morningstar Direct, Bloomberg and FactSet
2 Source: Institute for Supply Management
3 Source: Department of Labor
4 Source: Bureau of Labor Statistics
5 Source: Strategas Research