Economic Recovery Will Be Bumpy, But It Should Persist
Just when global equity prices might stumble, positive news seems to boost sentiment further. This good fortune will not last indefinitely, but we are not approaching a peak and risk-off phase. Policymakers are focused on supporting economic activity until a sustained recovery is underway. Short-term setbacks are still possible, but a material decline seems unlikely.
Still absent is a medical policy to control the virus, or allow a return to relatively normal economic and social activity. While we have seen some positive steps, a solution is not imminent. The longer it takes to develop a vaccine or successful therapies, the greater the risk to investor belief in a sustained economic outcome. Maintaining a strong reflationary bridge via other policy options is critical until a successful health outcome emerges, otherwise business failures and unemployment might intensify.
A cautious short-term strategy is warranted, given the huge equity-market rebound since March 23, unattractive valuations and signs of a resurge in infections. The declining U.S. dollar and the potential end to a longer period of U.S. equity market outperformance is a relatively new development. This is likely to be over multiple years, rather than ending than abruptly.
Last week’s second consecutive uptick in a new unemployment claims could be a precursor to a poor payroll report on August 7. It is unclear if unemployment will stay permanently high due to an inability to maintain normal levels of economic activity.
We remain cautious in the near term. School reopenings, a secondary wave of infections and a contentious U.S. election could unnerve investors. The cyclical economic recovery will be bumpier than many hoped, but it should persist as long as the monetary and fiscal reflationary bridge holds.
Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen.
1 Source: Bloomberg, Morningstar and FactSet