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

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
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 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

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 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

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

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.

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

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

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 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

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

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.

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.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

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

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.

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

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.

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1 Source: Morningstar Direct, Bloomberg and FactSet as of 3/31/17.
2 Source: Bureau of Labor Statistics.
3 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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