6. Trade restrictions have not yet had a significant negative impact on U.S. economic growth. This may be partially due to increased fiscal stimulus from tax cuts and additional spending. We believe, however, that tariffs may be hurting Chinese growth. Our guess is that Chinese growth is trending around 5 percent or 6 percent, close to (but below) the country’s official targets.
7. Changes to capital gains taxes would likely benefit U.S. stocks. The president has been pushing to index capital gains taxes to inflation. Should this come to pass, it would increase after-tax returns for equities, all else being equal.
Both Equity Prices And Bond Yields Should Increase Over The Next Year
Although equity prices have advanced over the last month, financial markets remain largely range-bound. Equities are being buoyed by strong corporate earnings and solid economic growth, but are held back by rising trade protectionism. At the same time, bond yields are being kept relatively low due to trade policy confusion and concerns over a possible slowdown in global economic growth.
It appears that global growth has downshifted slightly and become less synchronous compared to 2017. But we do not see signs that this downshift signals a broader slowdown, let alone a recession—especially in the United States. Global growth may not be firing on all cylinders, but it is still accelerating.
Nevertheless, many investors are looking for signs of the end of the current economic cycle and equity bull market. And signals are there: accelerating Fed rate hikes and the shrinking Fed balance sheet, high levels of U.S. corporate debt, the flattening yield curve, a slowdown in emerging markets economic growth and a slump in copper prices that could point to slowing industrial economic activity. In our view, these concerns appear overblown. Monetary policy remains easy, the U.S. corporate sector is very strong as evidenced by high levels of cash flow, and the yield curve is still a ways from inverting. Issues in emerging markets would only lead to broader contagion if trade issues worsen and the decline in copper prices appears more due to a correction than fundamental shifts.
We acknowledge that risks exist, but we do not see a specific catalyst likely to spark an imminent recession. Trade issues remain the primary wildcard: Should protectionism grow, it could trigger broader issues. Unfortunately, we don’t foresee much clarity on this topic any time soon (at least not before the midterm elections). In any case, we believe the current cycle will continue for some time, meaning we expect both equity prices and bond yields to rise over the next year.
Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen Asset Management.
1 Source: Morningstar Direct, Bloomberg and FactSet
2 Source: Bureau of Labor Statistics
3 Source: Evercore ISI Research