In recent months, we have seen increased softness in so-called “hard” economic data, including retail sales, automotive production and employment. At the same time, “soft” data such as business confidence measures point to an expectation of economic acceleration. In our experience, these disconnects typically result in a move in the soft data, suggesting confidence measures could be due for a setback. Should this happen, it could provide a headwind for equity prices.
Investors have become slightly more pessimistic in recent weeks. U.S. economic data has softened, and currently high consumer and business confidence levels could diminish. This sort of soft patch is nothing new. Over the last decade, we have seen numerous periods of mounting pessimism as the world has remained beset by choppy economic growth, deflation scares and numerous political risks. Given this backdrop and the overhang of the financial crisis and Great Recession, it is not surprising that safe-haven assets have remained in high demand and that global bond yields remain extremely low.
For several years, we have advocated a pro-growth investment stance, suggesting overweight positions in equities make sense. The recent downturn in economic data has not changed our view. At present, the biggest objection to this view is that many investors believe that equities in general, and U.S. equities in particular, are overvalued. While equity valuations are less attractive than several years ago, we still believe stocks are more attractive than bonds and cash. Additionally, we think equity valuations can be sustained or climb further, as long as bond yields remain low and corporate profits rise. From a geographic perspective, it would be reasonable to expect a “catch-up” phase when non-U.S. markets outperform U.S. stocks.
Download Nuveen Asset Management's latest commentary, or read a previous post from Nuveen called Where to Find Value in 2017.
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