2017 Ten Predictions: 1Q Update
This Bull Market Is Old. But It’s Not Over
When we made our predictions three months ago, we expected to see
the economy shift into a higher gear, interest rates rise and corporate
earnings improve. We also expected it would become a more difficult
environment for investors. It’s still early in the year, but so far our
predictions are mostly on track.
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Overall Scoring Right Direction Too Early to Call Wrong Direction
U.S. and global economic
growth improves modestly
as the dollar strengthens and
reaches parity with the euro.
First quarter growth in the U.S. is likely to be slow. But we expect the economy will
continue to gradually improve, as it has since the end of the Great Recession, and
possibly move into a higher gear. Globally, China is experiencing a slowdown,
but other areas of the world including Europe and most emerging markets are
improving. The second half of this prediction is looking dicey as the euro advanced in
value versus the dollar, moving from $1.04 to $1.07.1
Unemployment drops to its
lowest level in 17 years as
wages increase at the fastest
pace since the Great Recession.
The job markets remains a bright spot in the U.S. economy. The pace of new jobs has averaged 178,000 per month this year and the unemployment rate dropped to 4.5% in March.2 Wage rates climbed to an annualized 2.7% in March as well.2 As a reference point, the low in unemployment was 4.4% in May 2007, while wages reached 3.1% in June 2009.1
Treasury yields move higher
for a third consecutive year for
the first time in 36 years as the
Fed raises rates at least twice.
Treasury yields rose sharply following the election, but have trended more unevenly in
recent weeks. The yield on the 10-year Treasury started the year at 2.44%, rose to a high
of 2.63% before setting at 2.39% by quarter-end.1 The Fed already raised rates once
this year, and looks on track for one or possibly two more hikes later this year.
Stocks hit their 2017 highs
in the first half of the year
as earnings rise but price/
earnings multiples fall
Equities have rallied to start the year, but dipped slightly at the end of the quarter. The
S&P 500 Index peaked at 2,400 on March 1 and ended the quarter at 2,362.1 From a
valuation perspective, the S&P 500 trailing price/earnings multiple moved from 19.9x at
the beginning of the year to 21.2x at the end of the first quarter.1
Stocks outperform bonds for
the sixth year in a row for the
first time in 20 years while
Stocks are performing comfortably ahead of bonds so far this year, with the S&P 500
Index rising 6.1% compared to 0.8% for the Bloomberg Barclays U.S. Aggregate Bond
Index.1 Volatility has been quite low, but we don’t believe that will continue. The VIX
Index (a broad measure of equity market volatility) moved from 14.04 to 12.34 this
year,1 and remains well below its long-term average of 18.1
Small caps, cyclical sectors and
value styles beat large caps,
defensive and growth areas.
So far, this is the lone prediction on which we are mostly on the wrong side. The
Russell 2000 Index (up 2.5%) is trailing the Russell 1000 Index (up 6.0%); cyclical
sectors (up 4.6%) are close to defensives (up 4.1%); and the Russell 1000 Value Index
(up 3.3%) is losing to the Russell 1000 Growth Index (up 8.9%).1 We still have a ways
to go, however, and we expect these trends will change.
The financials, health care
and information technology
sectors outperform energy,
utilities and materials.
We’re getting this one correct so far. A basket of our preferred sectors is up 7.8%,
compared to a more modest 1.9% for our least-preferred.1
Active managers’ performance
improves as flows into
As investor confidence improves, people are slowly starting to move back into equity
mutual funds. The long-term outflow trend is starting to reverse. The Morningstar
Large Blend category saw outflows of $57.8 billion last year.1 This year, annualized
outflows are well behind that pace. At the same time, active managers are beginning
to improve. Last year, only 19% of large cap managers outperformed their
benchmarks, while 49% have so far this year.3
Nationalist and protectionist
trends rise as pro-domestic
policies are pursued globally.
In the United States, President Trump has been more focused on his domestic economic
agenda than on trade issues. He has continued his anti-globalization rhetoric and
indicated his desire to renegotiate international trade deals. Elsewhere in the world, the
U.K. is moving forward on Brexit plans and investors are closely watching the French
election and nationalist candidate Marine Le Pen.
Initial optimism about the
Trump agenda fades in light of
slow legislative progress.
We have been arguing since the election that investors were too optimistic about the
political backdrop and that President Trump would have difficulty enacting his legislative
agenda. This was encapsulated by the Republicans’ failure to even vote on their health
care reform bill in March. This triggered a market sell-off, as investors began questioning
the future of Trump’s agenda. We still expect tax reform to come to fruition, but it will be
a long and complicated road.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
A Word on Risk
The opinions expressed by the author are for informational purposes only as of the date of writing and may change at any time based on market or other conditions and may not come to pass. These views may differ from other investment professionals at Nuveen. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any time period. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-investment grade bonds involve heightened credit risk, liquidity risk, and potential for default. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. Past performance is no guarantee of future results.
Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen, LLC.