Bull Market's Big Supporters Ask What May Tip It to the BearsBy
Nuveen’s Doll says inflation pressures need to be more severe
Schwab’s Sonders says chance bar set too high for earnings
Some of the biggest proponents of the bull market in equities are starting to ask the question: when should you get out?
While the answer from some of the world’s largest money managers is that it’s not quite time yet, they’re identifying some triggers to watch for. On the list:
- A jump in inflation that causes central banks to tighten monetary policy faster than the gradual pace currently anticipated
- A miscommunication of policy from the Federal Reserve, which is set to get a new chairman in February and a near-complete overhaul of its board membership
- A disappointment in earnings growth relative to lofty expectations
Strategists at Nuveen Asset Management LLC, Charles Schwab Corp. and Northern Trust Corp., firms that collectively help oversee more than $5 trillion, agree on sticking it out for now after what’s been an 8-1/2-year bull market in global equities. The surge in stocks has driven valuations close to highs seen in the 2000s, and tipped them into “irrational exuberance,” a Bank of America Merrill Lynch survey indicated this month. Yet even as they fretted over cost, investors were extending bullish positions, that survey showed.
The MSCI All-Country World Index of global developed and emerging-market shares is up 18 percent this year, on track for its best annual gain since 2013.
Valuations are less compelling than they were several years ago and a long period of low volatility may mean stocks suffer a “more significant setback,” according to Nuveen Asset Management’s Bob Doll. Yet the inflation pressures that would cause central banks to lift interest rates aggressively aren’t materializing. “The fundamental backdrop suggests that this bull market remains intact.”
“We just don’t see the necessary ingredients to cause an end to the current economic expansion or equity bull market,” said Doll, senior portfolio manager and chief equity strategist at Nuveen. He wrote in his weekly market assessment that “stronger and more synchronous global growth should continue to support equity markets in 2018, while also driving inflation modestly higher.”
Over at Chicago-based Northern Trust, one key risk lies with the change in personnel at the Fed. Chair Janet Yellen said on Monday she will step down from the board once her successor is sworn into the office. That widens the scope for President Donald Trump to shape the central bank’s leadership for years to come, after he nominated one current governor and board member Jerome Powell to the chairmanship.
“The risk of a monetary misstep is critical, as low interest rates underpin high market valuations,” said Jim McDonald, chief investment strategist at Northern Trust. The chance of an inexperienced new leadership team flubbing communication wasn’t enough for him to change his outlook for monetary policy at this point, however.
McDonald is maintaining his bullish stance on stocks, favoring developed markets outside of the U.S.
For Liz Ann Sonders at Charles Schwab, the danger is that the bar set by investors for earnings-growth expectations is too high. She expects profits at S&P 500 Index companies to expand about 11 percent next year, having grown 12 percent in 2017. Still, she says, momentum favors the bulls for the foreseeable future.
“We will be vigilant in looking for signs of a peak in earnings growth next year, especially given stretched valuations,” she said. “Remember, better or worse matters more than good or bad.”