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

2017 Remains a Year
of Transition

At the beginning of the year, we labeled 2017 as a “Year of Transition.” We expected improving economic growth, accelerating corporate earnings, rising interest rates and climbing volatility. At the midpoint of the year, the fate of some of our predictions remains uncertain, but more are trending correct than heading in the wrong direction.

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Overall Scoring Heading in the Right Direction Too Early to Call Heading in the Wrong Direction
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 U.S. gross domestic product growth was relatively slow at 1.4%.1 Growth appears to have improved in the second quarter for many reasons, including increased inventory levels, and could approach 3%. The global economy also seems to be improving, but China remains a persistent weak spot. We are on the wrong side of this second prediction, as the dollar has weakened in the face of stronger non-U.S. economic growth. The euro has advanced against the dollar so far this year.2

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 hovering around a 2.5% annual growth rate.3 But with the economy at full employment, we expect wages will rise.

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

In June, the Fed raised interest rates for the second time this year (putting the fed funds rate at a range of between 1.0% and 1.25%), and the central bank indicated one more rate hike would be likely. Treasury yields, however, are nearly unchanged from where they were at the start of the year, with the yield on the 10-year Treasury falling slightly from 2.44% to 2.30%.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

Equity markets hover close to their all-time highs, but the momentum that dominated the first part of the year has faded. Earnings have improved dramatically: S&P 500 earnings increased almost 14% in the first quarter.4 From a valuation perspective, the S&P 500 trailing price/earnings multiple moved from 19.9x at the beginning of the year to 21.5x 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

Stocks are currently comfortably ahead of bonds. While volatility has actually fallen to its lowest level in several years, we expect it to pick up in the coming months. The VIX Index (a broad measure of equity market volatility) moved from 14.04 to 11.18 this year, and remains well below its long-term average of 18.2

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

We are mostly on the wrong side of this prediction as small caps and value styles have been underperforming.2 As of the end of the second quarter, cyclicals are actually slightly ahead of defensive areas.2 We expect economic growth to rebound this year, 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

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

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

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.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 52% have so far this year.5

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

This has clearly been the case in the United States, as President Trump announced a withdrawal from the Paris climate change accords, has reconsidered trade deals and questioned fellow NATO member states. In Europe, Brexit negotiations are ongoing, although the French presidential election provided a nod back toward globalization.

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

It is almost hard to remember the high level of political optimism when we made this prediction six months ago. Now the pendulum may have swung too far in the opposite direction. At this point, any hint of progress on tax cuts could be a positive for markets.

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1 Source: Bureau of Economic Analysis
2 Source: Morningstar Direct, Bloomberg and FactSet as of 6/30/17
3 Source: Bureau of Labor Statistics
4 Source: JP Morgan
5 Source: Bank of America Merrill Lynch

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.

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