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Investment Outlook
The economy and markets
Section 4: The economy and markets
Key points to know
Fundamental changes
As the global economy approaches the five-year anniversary of the pandemic, it is clear that fundamental conditions have changed. The pre-Covid world of low growth, low inflation and low interest rates is gone — and it is not coming back. Telecommuting and remote work have made labor markets more flexible. AI has driven a boom in tech investment and is transforming services sector jobs. Persistently high employment levels are spurring labor-saving investments. These trends are likely to boost potential growth. Policymakers, on both the fiscal and monetary sides, embraced more aggressive stimulus during the Covid downturn, driving higher inflation. Even as central banks have moved to offset these inflation pressures, fiscal policy remains extremely loose, skewing the risks toward persistently higher inflation.
A new economic regime
Already, these new dynamics are showing up in the economic data. Inflation (measured by annual core PCE) was below the Fed’s 2% target in 116 of 120 months in the pre-Covid decade; it has now been running above-target for 43 straight months. Real U.S. GDP growth has averaged 2.3% over the last five years (which includes the sharp Covid contraction), a much higher level than the 2010 to 2019 period, which averaged around 1.8% (Figure 2). We do not think the economy is likely to return to its “old normal” — overall nominal growth is likely to be materially higher moving forward. With the shift in U.S. politics, we expect to see renewed and even expanded tax cuts, providing even more support for higher growth and inflation.
Where are we headed?
Many of these deep-rooted, secular trends are slow to materialize. While they frame our medium- and longer-term outlooks, they can easily be overtaken by short-run dynamics pushing the economy far from equilibrium. The good news is that we do not foresee notable near-term disruptions, and the next several quarters are likely to look a lot like the next several years. Inflation remains above target. And though we believe there is further disinflation in the pipeline from housing and other core services, overall inflation is likely to remain above the Fed’s target. Growth is set to slow, but not drop to pre-Covid levels. Despite higher unemployment this year, income growth has remained strong, supporting a steady expansion in spending. That looks set to continue even as labor markets loosen further.
As the global economy approaches the five-year anniversary of the pandemic, it is clear that fundamental conditions have changed.
A higher nominal anchor
Ultimately, nominal growth is the principal driver of market performance. For equities, it determines overall earnings potential and it drives yield levels for fixed income. U.S. nominal growth performance versus the rest of the world also drives the U.S. dollar’s valuation. We expect to settle in to a new normal of around 5% nominal growth, rather than the pre-Covid trend of sub-4%. This means that rates are unlikely to fall as much as many expect, and risk assets are likely to be supported. We expect the 10-year Treasury yield to remain mostly rangebound from here, and for Fed rate cuts to be both slower and smaller than many expect.
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All market and economic data from Bloomberg, FactSet and Morningstar.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
Important information on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. 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. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy. Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well.
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