Robert C. Doll, CFA
Senior Portfolio Manager,
Chief Equity Strategist
Nuveen Asset Management, LLC

2017 Remains a Year
of Transition

We expected 2017 to feature improving economic growth, accelerating corporate earnings and rising interest rates. We also predicted rising volatility amid equity market leadership changes that would create a more difficult investment environment. As we enter the final quarter of the year, these general themes are mostly on track, but some predictions remain uncertain.

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01 U.S. and global economic growth improves modestly as the dollar strengthens and reaches parity with the euro Read more Show less

First quarter growth rose 1.4%, but that pace accelerated to 3.1% in the second quarter.1 The hurricanes are likely to muddy the data, but we expect this momentum to carry through the rest of the year. We are on the wrong side of the second half of this prediction, as the dollar has weakened this year.2 We expect the value of the dollar to rise as growth improves and interest rates move higher.

02 Unemployment drops to its lowest level in 17 years as wages increase at the fastest pace since the Great Recession Read more Show less

The first half of this prediction came true in May, when unemployment hit 4.3%, lower than the 4.4% reached in May 2007.2 Wage growth has remained stubbornly slow, with average hourly earnings still hovering around a 2.5% annual growth rate.3 We do expect wages will rise as the economy slowly improves.

03 Treasury yields move higher for a third consecutive year for the first time in 36 years as the Fed raises rates at least twice Read more Show less

The Fed has already hiked interest rates twice this year, and a third increase in December is increasingly likely, especially if inflation ticks higher. The 10-year Treasury yield fell sharply in early September to a 2017 low of 2.04%, but subsequently jumped higher to end the quarter at 2.33%.2 This is a touch below the 2.44% level at the beginning of 2017.2

04 Stocks hit their 2017 highs in the first half of the year as earnings rise but price/ earnings multiples fall Read more Show less

This prediction is a bit jumbled at this point. The S&P 500 Index peaked at 2,519 in late September.2 Corporate earnings have accelerated strongly so far this year, up 14% in the first quarter and 12% in the second.4 From a valuation perspective, the S&P 500 trailing price/earnings multiple moved from 19.9x at the beginning of the year to 22.3x at the end of the second quarter.2

05 Stocks outperform bonds for the sixth year in a row for the first time in 20 years while volatility rises Read more Show less

We are almost certain to get this prediction half-correct. Stocks are comfortably ahead of bonds this year, and we expect this will persist given market trends and relative valuations. Surprisingly, volatility has fallen this year. The VIX Index (a broad measure of equity market volatility) moved from 14.04 to 9.46, and remains well below its long-term average of 18.7.2

06 Small caps, cyclical sectors and value styles beat large caps, defensive and growth areas Read more Show less

We are more on the wrong side of this prediction, as small caps and value styles have been underperforming. As of the end of the third quarter, however, cyclicals (12.5%) are actually ahead of defensive areas (8.3%).2 We expect economic growth to improve, which should lead investors to bid up small cap stocks as well as cyclical and value sectors.

07 The financials, health care and information technology sectors outperform energy, utilities and materials Read more Show less

This prediction is the one on which we are “most correct.” Financials, health care and IT are among the best-performing sectors this year, up an average of 20.1%.2 Energy, utilities and materials are up only 7.0%.2

08 Active managers’ performance improves as flows into equities rise Read more Show less

As investor confidence improves, people are slowly moving 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.2 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 54% have so far this year.5

09 Nationalist and protectionist trends rise as pro-domestic policies are pursued globally Read more Show less

This trend has clearly developed in the United States, as President Trump has been pushing hard on immigration changes and reconsidering trade deals. We are also seeing this trend globally, with the most recent example being the rise of the Alternative for Germany party in the recent elections.

10 Initial optimism about the Trump agenda fades in light of slow legislative progress Read more Show less

The president has influenced some regulatory practices, but has yet to achieve any significant pro-growth legislative victories (highlighted by multiple failures to pass health care legislation). We are still cautiously optimistic that we will see modest tax reform in early 2018.

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1 Source: Bureau of Economic Analysis
2 Source: Source: Morningstar Direct, Bloomberg and FactSet as of 9/30/17
3 Source: Bureau of Labor Statistics
4 Source: JP Morgan and Strategas Research
5 Source: Bank of America Merrill Lynch

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.

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