5. The lack of consistent policy in Washington D.C. has been influencing investor behavior. Despite trade or budget issues, the economy seems solid from a consumer perspective. Still, the volatile and seemingly aimless climate in D.C. has spread to Wall Street, as investors are increasingly worried about erratic government policies.

Accommodative Global Monetary Conditions Are Not Easing Investor Fears

Global financial markets have hit an uneven patch due to profound uncertainty about the economy and policy. Considerable economic angst has resulted from erratic and bearish trade policy at a time when global exports have been contracting and U.S. and global manufacturing activity has been weak. Coincident global non-manufacturing economic indicators and employment trends are generally holding up well.

The plunge in government bond yields throughout the summer has created a massive supply of negative-yielding bonds around the world. Combined with modest policy easing, this scenario has created historically very accommodative monetary conditions. Nevertheless, investors have been more focused on the bearish yield curve rather than embracing record low bonds yields and easy monetary policies.

Historically, lower bond yields have stimulated economic activity on a lag. However, investors are currently unwilling to bet on better growth because protectionism is a potentially huge economic threat. Because the risk of protectionism has been absent for many decades, investors have become more sensitive to disappointing economic news or trade developments, resulting in equity and credit markets selloffs. A seemingly favorable U.S./ China trade meeting will not likely reduce investor angst, given false starts in the past have been followed by renewed hostilities.

Meanwhile, it’s difficult to claim that the business sector is not being hurt by tariffs and trade uncertainty, as confirmed by the U.S. and euro area PMI manufacturing surveys. For equities to reach a solid floor, we believe investors will need to see an upturn in global manufacturing activity and a marked easing in U.S. recession fears, neither of which currently seem likely.

Robert C. Doll, CFA, is chief equity strategist and senior portfolio manager at Nuveen.

1 Source: FactSet, Morningstar Direct and Bloomberg
2 Source: Markit

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