To us, this represents the biggest risk to stocks. It shouldn’t be surprising that the recent sharp correction was precipitated by a strong inflation reading. And rates and inflation appear to be in the midst of an important inflection point, with both rising from very low levels. This has the potential to contribute to greater periods of volatility in the months ahead.
This does not mean we are calling for an end to the current bull market or that we will see the extreme back-and-forth we experienced in recent weeks. Indeed, it is possible that we have already seen the low (around 2,525 for the S&P 500 Index) and the high (around 2,875) this year.1
One of our key investment themes for 2018 has been our belief that as economic growth improves, both yields and inflation would rise, causing more volatility
Such an environment can still be good for stock prices, but the road ahead is likely to remain bumpy as economic fundamentals continue to shift.
Robert C. Doll is chief equity strategist at Nuveen Asset Management.
1 Source: Morningstar Direct, Bloomberg and FactSet.
2 Source: Department of Labor