10. The long-term outlook for stocks is more positive than the short term. Over the next few months, market action is likely to be dominated by ongoing spikes in virus cases and uneven economic data. We continue to believe that a vaccine and successful medical treatments are necessary for the economy to enter a self-sustaining expansion. When that happens, it should create a better environment for stocks.
Stocks Continue To Face Near-Term Pressure
Since the recovery started, we have been concerned that investors were overly optimistic. Markets have rebounded strongly since the spring on hopes of medical advancements, ongoing monetary and fiscal stimulus and a return to stronger economic conditions. In contrast, investors generally ignored bad news such as signs that the virus was spreading, areas of the global economy (particularly in Europe) would shut down and additional fiscal stimulus was less likely. At the same time, markets had been advancing in the run up to the election, as most were looking past the prospects of a contested result or some longer-term negatives like prospects for higher taxes.
Over the last week, these concerns may finally have caught up to stocks, triggering a sharp selloff. Now, markets could overreact to the downside. Over the short-term, markets will likely be driven by the pandemic and the outcome of the U.S. elections. Regarding the former, a full return to normal economic activity clearly won’t happen without a vaccine and more effective treatments. Even if governments and policymakers don’t enact new lockdowns, many individuals and businesses will continue to impose restrictions. And for the latter, we should (hopefully) get some clarity this week so we can better gauge the financial impact of the election results.
In any case, the economic recovery is clearly slowing, but we do see better conditions on the horizon. The “easy” part of the recovery seems to be over, and we expect choppy economic data from here. The odds are high that we’ll see a sizable new fiscal stimulus package early next year, regardless of the election outcome. And we hope that medical advancements will spark more economic activity in the months ahead. While we expect more near-term economic and market turbulence, we think stock prices should climb over the next six to twelve months.
Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen.
Sources:
All market data from Bloomberg, Morningstar and FactSet
Economic growth data from the Bureau of Economic Analysis
Earnings data from Credit Suisse Research