Does the market decline signal a pullback?

U.S. equities finished mostly higher last week with the S&P 500 increasing 0.4%. A sharp sell-off on Friday tempered earlier gains and sent the Nasdaq into negative territory for the week. Support for the advance was attributed to dovish comments from Federal Reserve Chairman Janet Yellen, early signs that weather has not impeded underlying recovery and China's stimulus dynamics. Deeper cyclical pockets of the market largely outperformed, consistent with better sentiment for the economic recovery. Emerging markets extended their recent increases. Momentum investments came under renewed pressure. A rotation from growth to value should benefit if the recovery gains traction and rates move higher. In our minds, the next few trading days are critical. The abrupt downturn on Friday, coupled with an exhausted market, make us believe that in the near term stocks will likely trade sideways. WARMING TRENDS The transition to warm weather is finally here. March data is coming in stronger and we anticipate a string of more positive reports. Order backlogs, a forward-looking measure of manufacturing activity, increased sharply in March to a three-year high, a positive sign of underlying strength. Motor vehicle sales in March surged to the highest pace of annual sales in seven years. March job growth returned to levels in line with previous averages before winter took its toll. First-quarter real GDP growth is tracking at an annual rate of approximately 1.5%. We expect a pace of more than 3% in the second quarter as data rebounds. WEEKLY TOP THEMES The solid March employment report reflected a slightly above-trend increase in payrolls. Increases occurred in household employment, average work week and labor force participation. Private payroll employment hit a new all-time high. The new data demonstrates progress, yet since the report was in line with expectations, policymakers and investors are unlikely to change their approaches. Risks in China are a near-unanimous concern among investors. The key question centers on China's credit situation. The high and rising leverage ratio is a reflection partially of the country's high domestic savings and financial intermediation dominated by the banking system. Pressure to de-lever and policy constraints are economic head winds, but a material growth slowdown is not likely because of ample resources and policy maneuvering. First-quarter earnings seem to have been negatively affected by weather disruptions, currency and emerging-markets weakness. Pre-announcements reflect a tough quarter, with guidance to be watched more closely than over the last several quarters. THE BIG PICTURE Our view remains that investors will finally receive evidence of a sustainable but moderate global economic recovery. This will provide continuing support for U.S. and global equities, trigger another upturn in G7 bond government yields and encourage investors to continue rotating out of cash and bonds into equities and other growth investments. Fed tapering and the eventual start of rate hikes will inject periodic volatility into capital markets but should not derail the rise in stock prices or bond yields. Geopolitics will remain a source of near-term angst. Concern about China will linger, although we believe fears of a credit bust are exaggerated. We expect reasonably steady growth that should permit the developed market economic recovery to gather pace and eventually spread to parts of the emerging world. An improving global economy bodes well for corporate earnings and should provide support for the stock market. Equities could be range bound until increased earnings are clearly evident, but prices should eventually trend higher. Periodic setbacks should be limited in magnitude and duration, although volatility will remain higher than over the past year. We view weakness as a buying opportunity and favor a moderately pro-cyclical stance. Robert C. Doll is chief equity strategist and senior portfolio manager at Nuveen Asset Management.