Economic Growth, Not Politics, Is Probably the Biggest Risk
For some time, we have argued that equities and other risk assets looked overextended following their strong run-up since the election. In recent weeks, equities have been trading sideways and government bond prices have recovered.
More than politics, the economy probably presents a more probable roadblock for equities. We think economic sentiment may be too high and elevated confidence may make investors vulnerable to downside economic surprises. To be sure, we are not expecting a significant economic slowdown, but the nearly non-stop pace of positive economic data is unlikely to continue. At some point, a setback will likely be triggered by a manufacturing decline, soft oil prices, weakening data from China or some other factor, which could spark a risk-off phase. Nevertheless, we remain constructive in the medium and long-term toward risk assets, but are growing increasingly cautious about the short-term outlook.
Read an excerpt of the complete commentary below, or download the entire investment commentary as a PDF.
Key Points:
- Stock prices bounced back last week, thanks in part to the strongest consumer confidence level in nearly 17 years.
- Investors are focused on political risks, but we think potential for a near-term economic disappointment is a bigger issue.
- In any case, we remain constructive toward equities and other risk assets over the medium and long-term.
Tax reform is key to the pro-growth Trump agenda. When investors refer to the president’s pro-growth agenda, they generally mean regulatory reform, infrastructure spending and tax reform. President Trump has already enacted regulatory changes through executive orders. And we think a major infrastructure package is a low probability at this point. That means tax reform (especially corporate tax reform) will probably be the biggest political economic driver.
Failure of the GOP health care plan makes tax reform more difficult. A major component of the American Health Care Act was a $1 trillion repeal of taxes that were enacted as part of the Affordable Care Act and a corresponding set of cuts to Medicaid. Without that baseline reduction, policymakers will be forced to find other revenue offsets, making tax reform more difficult.
Download Nuveen Asset Management's latest commentary, or read their previous week's commentary Equities Sag as Political Optomism Returns to Earth.
To learn more about Nuveen Asset Management and other Money Managers, give us a call at 1-800-541-7774 or contact us here to speak with one of WrapManager's Wealth Managers.
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