9. Growth styles are looking expensive, but timing a rotation back to value is not clear. Weak corporate profits and low bond yields have been favoring growth over value. Relative price momentum and valuations suggest that growth is approaching extremes. But a sustained rotation into value would require a noticeable improvement in the economic backdrop, which could take time to develop.
10. The U.S. political backdrop looks highly uncertain. With President Trump’s poll numbers continuing to slip, a Democratic sweep of the White House and Congress is possible—or at least more of a possibility than markets are forecasting. Should that occur, we could expect tax increases and a more stringent regulatory environment, which could create headwinds for stock prices.
Investors May Be Overly Complacent About Near-Term Risks
Markets have stalled in recent weeks, after a sharp setback for stocks and other risk assets in March and a subsequent sharp recovery through much of April. Although volatility remains elevated, stock prices have struggled to move significantly higher or lower. At this point, investors can either bet on a positive outcome marked by a steady return to economic activity or a negative one in which economic re-opening struggles due to further rounds of infections and lockdowns.
We expect the economy will rebound modestly in the second half of 2020, but we also think investors may be pricing in a too-optimistic short-term view. Current stock valuations reflect a more even and clear re-opening scenario than we think is likely. We expect confusion and uncertainty as some regions start to re-open, and we are concerned that some areas of the world and within the U.S. are unlocking their economies prematurely. We also think it is too early to be optimistic over prospects for treatments and vaccines. If those take longer than expected to materialize, it could shatter investor sentiment. Looking down the road, we are also concerned about political uncertainty surrounding the U.S. elections and a possible increase in protectionism as the relationship between the U.S. and China continues to deteriorate.
Looking further ahead, we think the biggest positive so far is probably the massive and unprecedented monetary and fiscal stimulus and the prospects for additional support. The economic recovery will be uneven and will take some time, but we think the underlying economic structure of the world and U.S. remains sound. Corporate earnings are likely to remain under pressure for some time and corporate fundamentals will likely continue to deteriorate. But we are counting on better prospects for the economy and corporate earnings in the second half of this year and into 2021.
Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen.
1 Source: Bloomberg, Morningstar and FactSet
2 Source: Bureau of Labor Statistics
3 Source: Bureau of Economic Analysis
4 Source: Strategas Research
5 Source: Credit Suisse Research