From Bob Doll at Nuveen Investments:
It May Take Better News for the Rally to Continue
Financial markets appear to be normalizing in recent weeks after the risk asset rout that started the year. We would caution, however, that market improvements have come about because the news has become less bad, not because it has turned good. Investor sentiment is fragile and will likely remain so for some time. One of the key variables remains oil prices. Oil markets have stabilized in recent weeks, but volatility and a renewed downturn could occur anytime. We also believe we need a sustained improvement in U.S. and Chinese economic data before investors grow more confident. Finally, the global political system remains a wildcard. The current focus is on the possibility of the United Kingdom leaving the European Union. The odds favor the status quo, but a potential “brexit” would be destabilizing for the U.K., and the uncertainty is fueling downward pressure on risk assets.
I agree with Bob’s view that a broad US recession is unlikely. Energy and Materials sectors are contracting but the rest of the market has so far held up well. But I am concerned that profit margins are falling and sales growth is slowing — which could lead to weaker stock prices.
Shrinking bank net interest margins and a flattening yield curve both warn of a future credit contraction, however, that would make recession highly likely. Based on past (reactive rather than proactive) performance by the Fed we cannot expect swift action to avoid this threat.