Upside And Downside Risks May Result In Ongoing Volatility
We do not believe that we are close to the end of the current cycle of global economic expansion, but the endgame may develop more quickly than many investors expect. At this point, it appears that upside and downside risks for the economy and financial markets may be pretty well balanced. We offer the following list of reasons for optimism and reasons to be cautious, adapted from J.P. Morgan Research:6
Reasons To Be Optimistic
1) First quarter earnings are very strong.
2) Equity valuations are reasonable.
3) Corporate America is flush with cash.
4) U.S. growth momentum may be plateauing, but is not slowing.
5) Trade restrictions have not been as severe as feared.
6) Global monetary policy remains accommodative.
7) North Korea risks have eased.
Reasons To Be Cautious
1) Margin pressures could hurt future earnings.
2) Higher rates could represent a headwind for valuations.
3) Political risks may rise as the midterm elections approach.
4) Global growth may start to slow in the coming years.
5) Trade policy remains a long-term risk.
6) Investors may be too complacent about monetary tightening.
7) President Trump’s legal issues could escalate.
We expect stock prices will break new ground, but maybe not for some time.
Overall, we remain broadly constructive about the long-term outlook for stocks given economic and earnings momentum, and expect equities will continue to outperform bonds over the coming year. Over the near-term, however, we expect markets will remain stuck in the same broad trading range they have been in since early February as sentiment moves between concerns about slowing growth and rising inflation to optimism about earnings. We think stocks will again break new ground and push higher, but it may yet be several months or longer before that happens.
Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen Asset Management.
1 Source: Credit Suisse
2 Source: Morningstar Direct, Bloomberg and FactSet
3 Source: Bureau of Labor Statistics
4 Source: BMO Capital Markets
5 Source: Labor Department
6 Source: J.P. Morgan Research, Bull/Bear Debate, 4 May 2018