Equity strategist Bob Doll, recently hired at Nuveen after leaving BlackRock last fall, kicked off the new year in New York on Tuesday with his top 10 list of market and economy predictions for 2013.
The typically bullish Doll, hired to serve Chicago-based Nuveen Asset Management as senior portfolio manager of its asset-management operations, predicts that the U.S. stock market will hit record highs even as the economy struggles, and he likes emerging-market equities even more. His bullishness doesn’t extend to Europe, although even in that region he expects a climb out of recession.
Overall, Doll is cautiously optimistic on equities, and clearly waiting for the other shoe to drop on bonds. Investors would do well to steer clear of bond funds, he said, noting that fixed-income portfolios will trade down as interest rates meander higher in 2013. Smart investment will head into large-cap stock funds and the emerging markets, with companies that have a cyclical focus and lots of free cash flow, Doll said.
Looking at a handful of “base cases,” Doll (left) said the most likely future for the U.S. markets is a bond coupon “at best,” $108 S&P 500 earnings, 14.5x P/E and an S&P 500 target of 1,550.
“In the broadest terms, 2013 will see the United States experience a more ‘muddle-through economy’ and a ‘grind-higher’ equity market,” he said in a statement. “Our somewhat constructive outlook is not driven by expectations for a strong acceleration in global growth, but rather a modest improvement leading to increased business spending which will make the recovery broader and more sustainable than has been the case since the Great Recession ended.”
Before making the move to Nuveen, Doll was lead manager of the BlackRock Large Cap Growth Fund, Large Cap Value Fund and Large Cap Core Fund, and prior to that, he managed a series of large-cap Merrill Lynch funds.
As a big name in the industry, Doll has won both accolades and derision for his predictions, but either way, his tea-leaf readings are closely studied by market watchers. Doll himself awarded his 2012 predictions a score of 6 out of 10, saying for example that he correctly judged that U.S. equities would experience a double-digit percentage return but that he mistakenly believed Republicans would capture the Senate and defeat President Barack Obama.
That said, here are Doll’s 10 predictions for 2013.
1. The U.S. economy continues to muddle through with nominal growth below 5% for the seventh year in a row. Employment is improving and the corporate sector is strong, but wages are low with continued consumer deleveraging and uncertainty fears about taxes and health care, Doll said at the New York briefing. “We will not see a recession, but on the other hand, we won’t see acceleration, either.”
2. Europe begins to exit recession by the end of year as the ECB eases and financial stresses lessen. “I’m not arguing for good news this year out of Europe; I’m arguing for less bad news,” Doll said. He cited Citi Research data that shows European growth at a negative rate of 0.9% in the first quarter but moving toward a negative rate of just 0.2% by the end of the year.
3. The U.S. yield curve steepens as financial risks recede and deflationary threats lessen. “The 10-year Treasury yield will be higher by the end of 2013 than where it started,” Doll said.
4. U.S. stocks record a new all-time high as stocks advance for the fifth year in a row. “Don’t fight the Fed,” Doll advised, noting that risk assets usually rise on central bank easing. Stock market positives in 2013 include not only aggressive monetary easing, he said, but housing healing, potential capital expenditure increases by companies and a U.S. manufacturing renaissance as wages remain low. Negatives are slow earnings growth, and Doll predicts “sloppiness” in the fourth-quarter 2012 earnings releases that will start appearing in mid-January.
5. Emerging-market equities outperform developed-market equities. Good arguments for EM investing this year include easy monetary policy, easing inflation trends, strong population growth, more middle-class consumers, rising real wages, rising productivity and low government debt, according to Doll. “The fundamentals in the emerging world are relatively stronger than in developed markets,” he said, citing China and Brazil as two strong examples.
6. After two years of underperformance, U.S. multinationals outperform domestically focused companies. Why will multinationals outperform? Simple, says Doll: because global leading indicators are improving, and U.S. GDP growth is decelerating while growth outside of the U.S. is accelerating.
7. Large-cap stocks outperform small-cap stocks, and cyclical companies outperform defensive companies. “This is consistent with everything I’ve said so far,” Doll argued, saying that the turning point has arrived as big companies are now generating more revenues than small companies.
8. Dividends increase at a double-digit rate as payout ratios rise. The high degree of uncertainty about the future of the U.S. economy is resulting in more payouts to shareholders because companies are resisting reinvestment of their strong free cash flows, Doll said. “Our view is this double-digit increase will continue.”
9. A nascent U.S. manufacturing renaissance continues, powered by cheap natural gas. “This will be a theme for the decade,” Doll predicted. “Believe it or not, we are doing more and will continue to do more manufacturing” as the wage differentials to other countries continue to drop.
10. The U.S. government passes a $2 trillion to $3 trillion 10-year budget deal. The United States suffers from an overspending gap as outlays exceed tax revenues at historic levels, Doll believes. Polarization in Washington is a problem, he said, “but by hook or crook, these guys in Washington will get together.”
Read Nuveen Hires Ex-BlackRock Strategist Doll at AdvisorOne.