From Bob Doll at Nuveen Investments:
….Although we have a generally positive view toward the economy, earnings and equity markets, we think it is worth pointing out some possible risks given how quickly and how far markets have moved higher over the past month. To us, the main risk to equity markets is the surge in government bond yields and the rising value of the U.S. dollar. Higher bond yields could create a drag on equity valuations and a higher dollar could put pressure on corporate earnings.
If the current advances in yields and the dollar moderate, equity markets should not experience much damage ….we expect any equity market sell-off resulting from a possible yield/dollar spike to be short-lived.
We are also watching possible political negatives from Donald Trump’s presidency, such as escalating geopolitical turmoil, currency wars with China or anti-immigration/anti-globalization trends. Additionally, investors may become wary of improving sentiment and less attractive valuations.
….Unlike the period since the end of the Great Recession, market sell-offs have been brief and followed quickly by strong risk-on moves. As a result of this shift and a seemingly more solid economic and earnings backdrop, we think it makes sense to retain overweight positions in equities.
I am cautiously bullish. A lot of good could come out of Republican control of both Congress and the Senate, including a revision of the corporations tax code and a more cautious approach to globalization.
The dangers are high stock valuations, with the potential for a backlash if earnings falter or risk levels spike, and low business investment that could hurt future growth. I still consider a Trump administration an additional risk factor. Trump has made some solid appointments, like the highly-regarded Mike Mattis (pleased to see Michael McFaul, former Obama point man on Russia, supporting the appointment) but still has the potential to do some crazy stuff as Bob pointed out.