If Economic Growth Improves, Stock Prices Should Benefit
The global political backdrop has worsened in recent months, with rising tensions in the Middle East, uncertain U.S/China trade, Brexit and U.S. political infighting adding to economic and market uncertainty. The global economy runs the risk that the weakness in manufacturing, trade and capital expenditures could spill over to the still-strong labor market and consumer sector. If that should happen, the odds of a recession would grow.
The good news, though, is that so far there are only limited signs that this is happening. In fact, broader economic growth expectations may be too low. The Chinese economy appears to be getting back on track, with improvements in manufacturing and China’s rising demand for oil. And in the United States, recent purchasing managers’ index readings show strengthening manufacturing activity.4
In all, the economic risks appear fairly balanced. During most economic cycles, the expansion phase ends when monetary conditions tighten to the point that credit becomes unavailable. Given that the U.S. and the rest of the world are now in a monetary easing mode, that tightening doesn’t seem likely any time soon. The main economic risks seem to be coming from the political sphere, which is tough to gauge.
The earnings backdrop will be critical to the future direction of equity prices. Expectations for third quarter earnings results have already fallen to the point that we don’t expect negative surprises. But, in our opinion, expectations for the fourth quarter and 2020 remain too high, which could subject the markets to a negative shock should results fail to meet expectations. On balance, we do not expect a sharp recovery in global economic growth, but easing in U.S./ China trade tensions could boost manufacturing. This would be a significant catalyst for improving equity prices.
Robert C. Doll is chief equity strategist and senior portfolio manager at Nuveen.
1 Source: FactSet, Morningstar Direct and Bloomberg
2 Source: University of Michigan
3 Source: Raymond James Research
4 Source: Markit Economics