Looking over the last six months, Bob Doll assessed the status of the 10 predictions he made at the beginning of the year.
“Equity markets experienced a strong first half of the year, and stock prices already advanced to where we originally thought they would be at year-end,” Doll, chief equity strategist and senior portfolio manager of Nuveen Asset Management, wrote in “A Midyear 10 Predictions Assessment” on Monday. “Bond prices rose as yields fell, with the Federal Reserve continuing its monthly tapering of asset purchases.”
Doll said that while economic growth was disappointing early in the year, the earnings growth remained reasonably solid. Outside of the U.S., the pace of growth and the direction of financial markets remained mixed. Meanwhile, financial market volatility has remained extremely low.
Looking ahead for the rest of the year, Doll predicted that the main issues to watch would be the pace of economic and earnings growth, geopolitical hot spots and the continued debate on the Fed’s policy normalization.
“Our topline view is that we expect bonds to reverse their first-half strength, equity markets to be more volatile and stock selection to be a key driver of performance,” he wrote.
As of right now, Doll says he has gotten four of his predictions right and two wrong. Meanwhile, four of his predictions are still too early to call.
4 Predictions Doll Got Right:
1. U.S. equities record another good year despite enduring a 10% correction.
“Equities are certainly off to a good year, advancing 7.2% to date,” Doll said in a statement. “So far, we have seen two corrections of over 5% this year (in January and in April) but have not experienced a 10% one.”
Doll’s expectation in January was that a 10% correction during the year was likely to be caused by overbought and deteriorating technical conditions.
2. Dividends, stock buybacks, capex and M&A increase at a double-digit rate.
“M&A has been the story of the year, with global activity up close to 40%,” he wrote. “Dividend increases and share buybacks have been noticeable as well. Capital expenditures have yet to take off, but leading indicators are pointing in the right direction.”
In January, Doll said he expected the largesse to spread to business reinvestment and acquisitions, as a pent-up demand and aging of plants, equipment and technology argue for increases in those key areas.
3. The U.S. dollar appreciates as U.S. energy and manufacturing trends continue to improve.
“The dollar is slightly higher through midyear,” Doll stated, crediting Morningstar Direct and Bloomberg, as of June 27. “Energy production and manufacturing trends are up by any number of measures.”
Back in January, Doll said the U.S.’s move toward energy independence was already positively influencing the country’s trade deficit and had promises to enhance U.S. job expansion and economic growth.
4. Municipal bonds, led by high yield, outperform taxable bond counterparts.
“Municipal bonds (and high-yield munis in particular) have been stellar performers so far this year and have been easily outpacing taxable bonds,” he asserted. In January, Doll said widely publicized difficulties in Detroit and Puerto Rico had created an opportunity for municipal bond investors, and he predicted the tax-exempt market was positioned for outperformance.
2 Predictions Doll Got Wrong:
1. Cyclical stocks outperform defensive stocks.
“Cyclicals outperformed during the second quarter, but not by enough to counter the lead defensive stocks gained in the first quarter,” Doll wrote in his statement on Monday. “As the economy improves, our guess is that cyclicals will outperform defensive stocks.”
In January, Doll said he expected a stronger U.S. economic growth, a rise in capital expectations and some improvement in non-U.S. economies to reverse the recent trend of defensive stock leadership.
2. Gold falls for the second year and commodity prices languish.
“Commodities prices as a whole are higher for the year, and although gold was essentially flat for the second quarter, prices are still higher year-to-date thanks to the gold price spike during the height of the Ukraine crisis,” Doll wrote. “We still think prices will fall over the coming months.”
In January, Doll said that gold had run out of steam in 2013, and he expected it to remain under pressure this year from improving global growth and reduction in systemic threats, some rise in real interest rates and likely dollar improvement. Doll also expected trendless but volatile commodity prices in the new year, citing a lack of strong global demand and abundant supply for many commodities.
Too Early to Call:
1. The U.S. economy grows 3% as housing starts surpass 1 million and private employment hits an all-time high.
Doll predicted in January that the economic recovery that began in mid-2009 would likely show some broader and stronger growth in 2014 after several false starts. “The housing market is improving, and we think we’re on track to surpass 1 million housing starts,” Doll wrote. “Private employment already hit an all-time high in May. Following such a weak first quarter, achieving 3% growth for the year will be tougher, but we do expect second quarter growth to approach 4% and the second half of the year to be relatively strong as well.”
2. 10-Year Treasury yields move toward 3.5% as the Federal Reserve completes tapering and holds short-term rates near zero.
“The Fed is on track to complete tapering in the fourth quarter, and we expect it will hold short-term rates near zero” Doll wrote. “The yield on the 10-year Treasury is lower today than at the beginning of the year, although we think yields will climb over the coming months.”
In January, Doll had said he expected the bear market in bonds that started about 18 months ago to continue as interest rates slowly normalized.
3. Active managers outperform index funds.
“In large-cap U.S. equities, the trend of active managers outperforming started to emerge in July of last year,” Doll said in a statement. “So far, results have been uneven this year, but the most recent data shows improvements in relative performance for active managers, so the fate of this prediction remains to be seen.”
When asked if active managers had become more intelligent, Doll’s thoughts in January were that the broadening of the equity market and reduction of correlation may increase the ability of active managers to outperform benchmarks.
4. Republicans increase their lead in the House but fall short of capturing the Senate.
“It looks likely that Republicans will make gains in both houses,” Doll stated. “The U.S. Senate is clearly in play, so we won’t know until November if this one comes true.”
In January, Doll had said that Republicans would increase their 234-seat majority in the House, picking up between four and six seats in the November midterm elections, but, their campaign to win a majority in the Senate would fall short, as they are most likely to add three or four seats to their current 45.
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