Are investors overly pessimistic about downside market risks?
While fundamentals haven’t changed significantly, volatility has picked up recently and stocks have been trading in a broad range between their early February highs and the low established in last month’s correction. The U.S. and global economies appear on sound footing, inflation pressures appear contained, the labor market remains strong, corporate earnings are solid and interest rates have been rising only modestly. Given this divergence between our views and market behavior, we think it makes sense to focus on why we think some risks may be overstated.
Read a summary of Nuveen Asset Management's weekly investment commentary below, or download as a PDF.
- The United States can withstand additional interest rate increases. As widely expected, the Federal Reserve hiked rates last week and pointed to a strengthening U.S. economy. Although the Fed might increase rates slightly faster than earlier anticipated, interest rates remain historically low and remain well below a neutral level given economic growth and inflation trends. We do not believe rates will rise sharply or dramatically enough to derail the equity bull market.
- Trade issues are more rhetoric than reality, at least for now. Current trade issues appear to be more about appearance than actual policy shifts. True, President Trump’s steel and aluminum tariffs went into effect last week, but key trading regions were granted waivers, including Mexico, Canada, Argentina, Brazil, Australia, South Korea and the entire eurozone. Likewise, the president’s latest statements about more trade restrictions still require policy specifics.
Taking a step back, it seems that most of the trade discussion is about political posturing rather than economic reality. President Trump has essentially fired a series of warning shots at China and it is unclear what the specific follow-throughs may be, especially when it comes to trade disputes with other countries.
- The U.S. economy may be leveling out, but does not appear to be slowing. Relatively weak retail sales figures have led economists to expect a slight slowdown in first quarter growth. Other areas of the economy, such as the labor market and manufacturing, remain strong. This indicates to us that growth should rebound in the second quarter
- Recent under-performance of mega-cap tech stocks does not mean the bull market is ending. Concerns are understandable, since this area of the market has been a stalwart leader for years. But we think this reflects growing divergence between areas of the market rather than a leading indicator for the market as a whole.
Until more clarity emerges, we are approaching equity markets cautiously. We would not be surprised to see relatively high levels of volatility continue, and we may not be out of the woods with the current correction.
Longer-term, however, we retain a relatively optimistic view toward stock markets. We do not believe we are approaching an economic recession or an imminent equity bear market. We expect that, over time, stock prices will again be able to climb the wall of worry.
For the complete commentary from Nuveen, including their thoughts on a trade war with China, download Nuveen Asset Management's latest commentary. Alternatively, read a previous article from Nuveen about the affect of trade tariffs.