Equity Market Risks Are Present, But This Isn’t The Onset Of A Bear Phase
Global financial markets appear to have settled into short-term trading ranges after February’s bout of higher volatility. Stocks are holding above recent lows, but have not sustained much upward momentum.
The most immediate risks are the rise in inflation expectations and increasing bond yields. Inflation is not rising quickly or dramatically, but it is ticking higher and will affect monetary policy. Likewise, the surge higher in bond yields last month undermined equity prices. And we expect upward pressure on bond yields to persist, given a generally decent global economic backdrop.
The effect of rising protectionism is a tougher risk to gauge. This threat could potentially be massive, depending on how restrictive tariffs become and to what extent they trigger a possible trade war. But it is also a threat that is hard to assess given a wide variety of possible outcomes.
We expect stock prices will again start grinding higher and believe equities will outperform bonds while this economic expansion continues. Since we believe we are more than a year away from the next recession, we think it makes sense for investors to stay with overweights to equities but also to expect additional volatility.
Robert C. Doll, CFA, is senior portfolio manager and chief equity strategist at Nuveen Asset Management.
1 Source: Morningstar Direct, Bloomberg and FactSet
2 Source: Commerce Department
3 Source: Federal Reserve