Highlights
• A number of economic bright spots remain, but we think the pace of the recovery is slowing. The economy remains reliant on fiscal stimulus until a medical breakthrough could help spark a self-sustaining expansion.

• We think equity markets could be vulnerable to a number of near-term disappointments.

• We think stocks will eventually benefit from a stronger global economic recovery, more political clarity and a coronavirus vaccine, but until that happens, equities are likely to remain stuck in their current trading range.

Stocks snapped a three-week winning streak last week, with the S&P 500 Index dropping 0.5%. The U.S. elections continued to dominate the headlines, with polls showing an increasing likelihood of a Biden victory and Democratic sweep of Congress. The on-again, off-again fiscal stimulus negotiations were also in the news with expectations growing for a postelection package. Undoubtedly, politics will continue to dominate financial headlines for at least the next couple of weeks.​

Ten Observations And Themes
1. The labor market continues to recover. The most recent weekly jobless claims data beat expectations and the reading was one of the lowest of the current recovery.

2. The housing recovery remains an important tailwind for the economy. Low mortgage rates and strong household balance sheets should keep the housing sector strong. Additionally, potential new homebuyers tend to have relatively high incomes, which is the same demographic that has better weathered the economic recession.

3. The resilience of the U.S. consumer sector could be tested. Individuals seem highly willing to spend for now, but that could change if the labor market softens. A new fiscal stimulus package would ease this risk.

4. The U.S. economic recovery is slowing. The effects of fiscal stimulus are running out, and we think the economy needs an additional jolt. Ultimately, a self-sustaining expansion will require a coronavirus medical breakthrough. Until that happens, the economy will be dependent on more support.

5. The Chinese economic recovery is continuing, which should continue to help commodity prices and put downward pressure on the U.S. dollar.

6. Third quarter corporate earnings are ahead of expectations. At present, 83% of companies beat estimates by an average of 18%. Earnings are on track to be down a better-than-expected—17%.

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.