5. The pace of jobs growth may also be slowing. Last week’s rise in unemployment claims could mean that jobs growth is plateauing.
6. Rising debt issues are a concern, but fundamentals still look decent. The overall debt profile of the U.S. government is worsening, which could present significant economic issues over time. But household and corporate debt levels are healthy, and we don’t think we are entering an environment of serious credit issues.
7. The risks that caused the fourth quarter market selloff may have faded, but other issues remain. A long list of issues could trip up markets this spring, including Brexit, reemerging trade disputes, political uncertainty in the run-up to the 2020 election and the Mueller investigation. But we don’t expect these issues to cause the same worries that drove markets lower at the end of 2018.
A Near-Term Pullback Is Possible, But We Suggest Sticking With A Moderate Pro-Growth Stance
Stocks have advanced since the end of last year on the back of increased optimism over trade issues, mostly solid economic data and less-worse-than-expected corporate earnings results. The dramatic shift toward dovishness in Federal Reserve rhetoric has also helped. But economic data has softened a bit over the last couple of weeks. The key question now is whether this is due to temporary factors, such as the government shutdown or Brexit uncertainty, or if it reflects a fundamental downshift from the fading effects of corporate tax cuts, debt issues or a delayed impact from Fed rate hikes.
The answer to that question will probably determine the direction of the stock market in 2019. Over the near term, we think prices may have come too far, too fast, meaning markets could be due for a consolidation or pullback. But even if that were to happen, we doubt markets would retest their December lows. We expect markets will be volatile this year, but continued slow growth in the economy and corporate earnings should boost stock prices higher by year end.
As such, we think it makes sense for investors to stick with a moderately pro-growth stance. At the same time, we think investors may want to be selective and tactical—focusing on higher-quality companies, while selling into strength and buying into weakness.
Robert C. Doll is chief equity strategist and senior portfolio manager for Nuveen.
1. Source: FactSet, Morningstar Direct and Bloomberg