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Nuveen's Doll: Not Yet Seeing Signs Of A Correction

In his weekly newsletter, Nuveen Asset Management's Bob Doll isn't seeing any warning signs yet that could signal a correction. He said:

"Over the past 18 months, investor sentiment appears to have come full circle. In mid-2016, deflation fears reigned and investors seemed eager to embrace negative news. Since that time, however, optimism toward economic growth, earnings growth and stock market prospects have become the main investment themes. The most recent example of this trend is the incredibly positive reaction to last month’s tax bill, which has caused investors and analysts to forecast increasingly higher earnings results even as valuations are growing less attractive.

Such an environment causes us to take pause and examine the risks. Earnings expectations are quite high. While we think they can still be met, the higher expectations rise, the harder it will be for results to beat estimates."

Doll has concerns about the bond market, however. He continued:

"Short-term yields have already been rising quickly and longer-term yields are starting to follow. We don’t see warning signs yet, but as the 10-year Treasury yield approaches 3%, the more concerned we would be that rising yields could cause negative pressure on stock prices. Similarly, we expect rising inflation could cause problems, especially if the pace of economic growth improvements is interrupted.

But while these risks are rising, we do not think they have reached critical levels. Market fundamentals remain sound, breadth is improving and valuations are not yet stretched. As such, we think investors should stick with a pro-growth investment stance, but should increasingly be on the lookout for warning signs."