Equities have enjoyed hugely impressive gains so far this year, as fundamentals have improved and investor sentiment turned more positive. In our view, markets may be more vulnerable to a correction now than at the beginning of the year. At the same time, we find it hard to identify a specific trigger that could cause a more significant setback.
Normally, bull markets end as a result of rising inflation, slowing growth or a monetary policy mistake. None of those events seems likely any time soon. At some point, we think that government bond yields will likely rise more sharply than they have this year, and we expect global central banks to become less accommodative. Both events would likely contribute to stock market volatility and could represent headwinds. But neither event seems imminent. Central bankers are moving very cautiously and government bond yields have remained stubbornly low.
At the same time, we expect inflation to eventually move higher (especially wage inflation), but this should not occur dramatically or quickly. And finally, global economic growth appears to be improving, and we find it tough to make a case for a U.S. or global recession.
Over the next year, we think risks to government bond markets are likely to climb and equity market gains should be more muted than in 2017. But the fundamental backdrop suggests that a pro-growth investment stance continues to make sense, and we believe investors should continue overweighting equities in their portfolios.
Bob Doll is chief equity strategist at Nuveen Asset Management.
1 Source: Morningstar Direct, as of 12/1/17
2 Source: ISI Evercore
3 Source: Institute for Supply Management & Markit