Highlights
• We expect a wave of grim economic data and corporate earnings in the coming months. Until we see economic conditions improve, it will be tough for equity prices to make substantive gains. And unfortunately, we expect the global economic reopening to be uneven, confusing and inconsistent.
• On the bright side, we think this bear market has already reached its low, thanks to massive policy stimulus. While an equity selloff is likely in the coming weeks, long-term prospects are looking better.

Following several weeks of strong gains, equity markets sank last week, with the S&P 500 Index falling 1.3%.¹ Extreme volatility in the oil markets rattled investors, but much of the loss seemed to be a result of consolidation following a sharp rally. Only the energy sector experienced positive results, even as oil prices dropped 32% for their largest one-week decline in history.¹ Defensive sectors such as REITs and utilities put in the worst performance.​

10 Observations And Themes
1. Fiscal stimulus is continuing, but could become more controversial. Last week’s new measure will provide $370 billion for small businesses and an additional $100 billion for health care and testing funding, bringing the total fiscal stimulus to over $3 trillion. The next fiscal policy discussion will be over providing federal aid to states, which will be very controversial.

2. Unemployment continues to soar. This past week’s initial jobless claims have probably pushed the overall unemployment level to above 20%.² We think that number will peak around 25%.

3. Corporate earnings are plummeting, but sectors show differences. With about one-quarter of S&P 500 companies reporting, first quarter earnings appear to be down around 15%.³ And we’re expecting second quarter results to be down by about 50%. Results so far have been highly bifurcated, with the consumer staples, communications services, health care, technology, utilities and REITs sectors either flat or up slightly. Energy, consumer discretionary, financials, industrials and materials are down by double digits.³

4. Oil prices are likely to remain highly volatile. Prices had previously been pressured by a collapse in demand and producers’ unwillingness to cut supply. With storage capacity for existing supply running out, prices fell into negative territory last week for the first time in history.¹

5. The next chapter in the coronavirus story will be marked by confusion over economic re-opening. The U.S. is starting to shift from widespread agreement over social distancing to disagreements over when and how the economy should re-open. Tradeoffs will be inevitable, and confusion will likely escalate. We think the re-opening phase will be slow, uneven, inconsistent, controversial and tough to measure.

6. China’s economic re-opening has been volatile, but moving in a positive direction. Improvements in demand have been widely inconsistent across industries, but generally appear to be improving from a very low base.

7. The health care and technology sectors appear poised to remain well positioned. It is not surprising to see these areas of the market outperform, with health care being the main public and private priority for the time being and individuals and companies increasingly relying on technological solutions to manage through the crisis.

8. A debate over inflation is likely to emerge. Right now, inflation is essentially nonexistent. But the combination of massive federal spending and an eventual economic improvement could put upward pressure on inflation by the end of 2020 and/or into 2021.

9. Political history suggests a tough road for Donald Trump. William McKinley was reelected in 1900 during the tail end of a recession. Since that time, the 10 presidents who have been reelected did not see a recession in the last two years of their first term. The five who did were not reelected.

10. Stocks are caught between two strongly competing forces. On one side is the $5 trillion worth of monetary policy and the $3 trillion worth of fiscal stimulus. On the other is a massive collapse in economic growth and corporate earnings. The policy stimulus is winning so far, but we expect the other side to win a battle or two before all of this is over.

Stock Prices Are More Likely To Fall In The Near Term And Rise Over The Long Term
Investor sentiment has improved since the end of March, thanks to massive monetary and fiscal policy stimulus. Stocks have now recouped more than half of the losses suffered between the February 19 high and March 23 low.¹ At this point, we think further gains in stock prices will depend on whether global economic activity can restart sufficiently, which would boost the odds of better corporate profits in the coming quarters.

Absent an unexpected breakthrough in coronavirus treatment, however, we don’t expect economic activity to restart consistently. Rather, we anticipate a combination of confusion and false starts, as well as periods of relief and disappointment. If the economy can get on track more quickly, that would obviously be a positive for stocks. Conversely, the main downside risk is if the economy reopens too quickly and triggers fresh waves of infections and panic. We are also growing concerned about the stalling in the narrowing of credit spreads. If policymakers cannot keep credit markets functioning, that could also trigger a broader risk-off move.

Looking ahead, we think the next few months will be bumpy, as the economic data turn more grim and reopening plans lack clarity. Despite open-ended fiscal and monetary support, we expect more downside than upside action in stock prices in the weeks ahead. At the same time, though, we think the low of 2,192 for the S&P 500 on March 23 will remain the low for this bear market.¹ That suggests buying opportunities for investors with long-term time horizons who can handle near-term risks.

Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen.

¹ Source: Bloomberg, Morningstar and FactSet
² Source: Department of Labor
³ Source: Credit Suisse Research