As market volatility continues to be a focus point for investors, money managers are keeping a close eye on key market indicators. This week we share the market commentaries presented by Robert C. Doll, CFA, the Senior Portfolio Manager and Chief Equity Strategist at Nuveen Asset Management, and Richard Turnill, the Global Chief Investment Strategist at BlackRock.
While their analyses highlight many of the same economic and market factors, their interpretations have distinct flavors. Doll feels that while the “equity markets have been buffeted by a number of credible threats so far in 2018,” it “shouldn’t be enough to actually cause a bear market,” yet, “these risks will need to ease before stocks can regain their footing.” Interestingly, Turnill feels that “the market environment in 2018 has returned to a more ‘normal’ mix of lower returns and higher volatility,” which “reflects rising economic uncertainty and less room for growth to exceed expectations,” but should not “spell the end of the equity bull market, now in its ninth year.”
Continue reading for a more detailed analysis of the current market from both Nuveen Asset Management and BlackRock Investment Institute.
Nuveen Asset Management – Robert C. Doll, CFA
Stock Prices Rise, But Investing Is Becoming More Challenging
Investors continued to focus on a wide range of big-picture risks last week, including economic growth data, inflation, U.S. political turmoil, geopolitical issues and trade worries. The good news was that investors could also react to first quarter earnings results, which have started off quite strong. Markets rose early in the week before sinking on Thursday and Friday, as the S&P 500 Index climbed 0.5%. The energy and industrials sectors were the best-performing areas, while consumer staples and technology lagged. Treasuries also came under pressure as yields rose to their highest levels in years.
Equity markets have been buffeted by a number of credible threats so far in 2018. The dollar has lost value, trade tensions have escalated, global government bond yields have spiked and the LIBOR-OIS spread (the difference between the interbank lending rate and overnight indexed swap rate) has widened, which is a sign of stress in the banking system.
Global growth momentum is likely to downshift this year at the same time that inflation creeps higher and monetary conditions slowly become less accommodative. In contrast to movements in financial markets over the past several years, we expect bond yields will rise more meaningfully during risk-on phases. This will put increased downward price pressures on fixed income assets.
We believe these and other risks will continue to trip up equities, but shouldn’t be enough to actually cause a bear market. At the same time, we think these risks will need to ease before stocks can regain their footing. So far, trends have been mixed: The dollar has consolidated losses since January and the LIBOR-OIS spread widening has paused, but trade risks remain and bond yields have started rising again.
The correction and consolidation in equity markets that began in early February has taken some froth out of the markets, and stock prices seem to have settled into a broad trading range. Equity volatility has remained elevated and that isn’t likely to change, but the good news is that corporate earnings continue to improve. For now, it appears that the tailwinds for stocks remain stronger than the headwinds, but given all of the possible downside risks, we do not expect equity prices to chart new highs any time soon. As such, this remains an environment in which investors will need to be tactical and more selective in their portfolios in order to find investment opportunities.
- Equity markets remain exposed to a number of serious risks, including trade issues, rising bond yields and inflation, stress in the banking system and political turmoil.
- The good news is that corporate earnings continue to improve, which will be critical if stock prices are to rise.
- For now, we think the tailwinds for stocks are stronger than the headwinds, but we will need to see risks diminish before equities can break out of their trading ranges.
BlackRock Investment Institute – Richard Turnill
A Return to the Old Normal
Last year was an extraordinary one for markets with strong returns and rock-bottom volatility (vol) across most asset classes. The market environment in 2018 has returned to a more “normal” mix of lower returns and higher vol. This reflects rising economic uncertainty and less room for growth to exceed expectations.
Volatility was unusually low in 2017, even in the context of low-vol regimes we have seen since 1980. The recent plunge in the Sharpe ratio also comes amid more muted asset returns and rising U.S. cash rates – a product of the Federal Reserve’s gradual monetary tightening.
What explains the shifting market backdrop? We see two key factors.
First, economic uncertainty has risen as U.S. stimulus and trade policy actions have broadened the range of possible outcomes compared with 2017. Second, we see less scope for growth outside the U.S. to beat expectations.
This points to a bumpy road ahead for markets, especially when combined with elevated geopolitical risks and slowly rising inflation. Yet we do not believe lower returns and higher short-term volatility spell the end of the equity bull market, now in its ninth year. Nor do we see warning signs, such as a widespread buildup in leverage, that would signal the end of the expansionary cycle.
We see synchronized global growth with room to run providing a solid foundation for equities. We see higher interest rates ahead, but plentiful global savings should keep yield rises moderate – even amid rising U.S. bond issuance. We see market returns being driven by earnings growth, dividends and coupons, rather than rising valuations. This, too, is a return to normal.
- We see more “normal” markets ahead: lower returns and higher vol amid rising economic uncertainty and less room for growth to top expectations.
- Global equities clawed back into positive territory year-to-date in U.S. dollar terms, and China’s central bank cut its deposit reserve rate.
- We see tax cuts and a healthy consumer supporting U.S. earnings this week. Risks to eurozone results: a stronger euro and weaker economy.
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