Whether weakness in the manufacturing sector will spread to the much larger services sector is still in question, but deceleration in service-sector activity has been limited thus far. This is a key difference from the 2001-2002 and 2008-2009 periods, when service sector activity collapsed in lock step with manufacturing activity.
The depressed manufacturing and trade activity may improve modestly, supporting risk assets. Yet the political landscape has become more problematic, especially following the start of a presidential impeachment inquiry by the U.S. House of Representatives. Next year’s U.S. elections already represented a risk to markets because of the uncertain outcome and the sharply contrasting policy objectives of the two parties.
The economic toll from the U.S./China trade war is still rising, with other trade tensions escalating. A possible hard Brexit, unrest in Hong Kong and the recent attacks on Saudi oil facilities reinforce the threat of significant negative political shocks. Until recently, key equity benchmarks, including the S &P 500, had been resilient despite disappointing earnings.
We retain our moderately upbeat outlook for the global economy, but heightened uncertainty mitigates our current appetite for risk. We do not rule out another move higher for equities and other pro-growth assets, but don’t we see it becoming sustainable. Accordingly, we maintain our neutral stance on equities.
Robert Doll is chief equity strategist and senior portfolio manager at Nuveen.