7. Interest rates could continue moving higher. The 10-year Treasury yield broke above the 0.8% mark last week, marking the first time since 2018 that the yield is higher than its 200-day moving average. A reasonably resilient economy, a weaker U.S. dollar, signs of inflation and prospects for additional fiscal stimulus in 2021 all suggest yields could continue to rise.
8. Broad U.S. stock prices have been flat for the last couple of months, but financial markets have seen notable changes, including: a weakening dollar, rising bond yields, a steepening Treasury curve, higher commodity prices and relative strength in small caps, emerging markets and cyclical stocks.
9. The financial sector could see better relative performance. Low yields, rising loan loss provisions, dividend cuts and worries about loan growth have all hurt this sector, but stronger economic growth and a steeper yield curve should eventually benefit financials.
10. Investors may be looking past some political risk. Stock prices have been rising as investors are starting to anticipate a higher probability of the “Blue Wave” scenario. Such an outcome would likely result in additional federal spending and a robust stimulus package that could benefit equities. But it would also likely mean higher corporate taxes and a stricter regulatory environment, which would be negatives for stocks.
Markets Still Look Vulnerable To Near-Term Risks
Investors appear relatively sanguine about a number of near-term risks. First, despite a rise in coronavirus cases, most policymakers are not looking to enact additional economic restrictions, leading investors to believe that the recovery can continue unimpeded. Relatedly, markets are also pricing in a high likelihood of a vaccine, or at least a significant medical breakthrough, in the next couple of months. Furthermore, investors have grown more confident about the political backdrop and are banking on high odds of a smooth, uncontested election followed by a significant new fiscal stimulus package.
The problem, of course, is that such an environment is essentially a best-case scenario. We have a more cautious view, and think economic momentum is losing steam and will struggle until the direction of the pandemic becomes clearer. And we wouldn’t be too quick to discount the possibility of election uncertainty and drawn out post-election political turmoil. As such, we think markets may be vulnerable to some near-term disappointments.
While we don’t necessarily have a pessimistic view about the economy and stock market, we think that valuations are looking relatively full and that stocks are likely to churn and move sideways as they remain in a broad trading range. Ultimately, we expect that political clarity, medical advancements and continued economic reopening will pave the way for a stronger globally synchronized and self-sustaining economic expansion, but the timing remains elusive.
When that does occur, it would help stock prices move higher, and would also likely lead to a leadership rotation away from growth toward value and away from U.S. stocks to other developed and emerging markets.
Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen.
Sources: All market data from Bloomberg, Morningstar and FactSet. Earnings data from Credit Suisse Research.