9. The weaker U.S. dollar should help non-U.S. stocks. In particular, we think emerging markets will benefit. A weaker dollar usually means higher commodity prices, and many EM economies are highly commodity dependent.

10. The health care sector appears well positioned. Health care stocks have been outperforming, thanks to increased demand and favorable demographic trends (an aging population and growing middle class around the world). The sector has also provided downside protection during bear markets and recessions, as health care spending tends to remain resilient. We think the sector should continue to enjoy favorable tailwinds.

Investors Should Remain Cautious
Investor confidence is buoyant, as reflected by stock prices approaching new highs, commodity markets rising and government bond markets remaining firm. Investors seem to believe that the economic recovery will continue, despite a rising number of coronavirus cases, and that fiscal and monetary policy will help protect against possible downside market risks. We also think that markets are pricing in the probability of widespread vaccine availability next year. In addition, the FOMO and TINA factors have been pushing stock prices higher.

In our view, investors may be overly optimistic. Much of the possible good news is already priced in to markets, and valuations are starting to look stretched. We believe the economic recovery will continue, but also expect it to be choppier than many expect. The recovery is fully in force, but the global economy remains on shakier footing today than it was at the start of the year.

Policy support remains crucial, but may be running out of steam. Additionally, even if we do see a vaccine available by early next year, we think global demand will remain below where it was at the start of the year for some time. Finally, it’s also worth pointing out that a weakening dollar and surging gold prices are usually associated with rising market volatility.

Strong market momentum, favorable investor sentiment and supportive monetary and fiscal policy have all been driving markets higher since April. These factors remain in place and are important tailwinds. But fundamentals ultimately determine market performance. And with valuations looking full and corporate earnings likely to struggle, we think investors should be approaching markets with caution and selectivity.

Robert C. Doll is senior portfolio manager and chief equity strategist.


1 Source: Bloomberg, Morningstar and FactSet
2 Source: Bureau of Labor Statistics
3 Source: Institute of Supply Management
4 Source: Credit Suisse

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