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Bob Doll’s 10 Predictions for 2015 on Markets, Economy

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Every year Bob Doll makes 10 predictions about the economy and markets, and every year he scores his prior year predictions while looking ahead 12 months.

On Wednesday at the Lotos Club in New York, Doll gave himself a 6.5 rating (out of 10) for his 2014 predictions, while he characterized 2015 as a year of “increasing belief” in the bull market; 2014, he said, was “the least believed bull market of my career.”

So what does Nuveen’s chief equity strategist predict in 2015 for the markets and economy? There’s “solid momentum in U.S. economic growth with low inflation,” he said on Wednesday, while the “jobs market is ebullient.” While there was a “dichotomy” between the U.S. economy and the bull stock market, the “real economy is improving,”

He expects U.S. corporations to post a “solid year of earnings growth” in 2015, and says those companies will spend some of those earnings on stock buybacks, increased dividends, increased capital expenditures and, yes, hiring new employees.

The precipitous drop in oil prices is “good for all consumers; not good for energy producers,” but the swiftness of the decline in oil prices is giving the markets something to “worry about.” As for other clouds on the horizon, Doll said most of the “problems are outside the U.S.,” such as the possibility of deflation in Europe and reflation in Japan, though cyberterrorism is also cause for concern.

As for the markets, Doll predicted that U.S. equities will “enjoy another good yet volatile year” in 2015 and that U.S. equity mutual funds will see “significant inflows.”  The “volatility” that will be in evidence during the year will in fact be a return to a more normal level of volatility, not the low levels that prevailed in 2014.

Over all, he believes the U.S. is in the “transition to the second half of the business recovery,” which is traditionally when wage gains occur, mentioning in response to a question from this reporter that in the last six months, “corporate America has hired more workers than at any other” such period over the past 25 years. 

Check out last year’s list, Bob Doll: 10 Economic Predictions for 2014.

Following are Bob Doll’s 10 predictions for 2015.

1. U.S. GDP grows 3% for the first time since 2005.

The U.S. economy looks “increasingly able to stand on its own two feet and no longer requires first aid from the Federal Reserve,” Doll wrote. Moreover, “GDP may benefit from lower oil prices,” Doll said, and while energy explorers and producers may cut back on capital expenditures, energy accounts for only 10% of overall U.S. capex spending. He pointed out that the U.S. “manufacturing renaissance” is now in its fourth year, and that he already sees “some signs of rising wages,” a trend that would be consistent with the U.S. being in the second phase of a business recovery. Contrary to popular opinion, Doll said that the jobs added during the revovery were “mainly high-wage” jobs.

The only drag on the economy would come from a drop in exports due to slower economic growth abroad and a high dollar, but he pointed out that exports account for only 12% of U.S. GDP, compared with Germany, for example, where exports account for nearly 50% of the economy.

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2. Core inflation remains contained, but wage growth begins to increase.

Doll said that the decrease in unemployment “should drive wages higher,” which usually happens when the jobless rate hits about 6%. Doll wrote that such an increase in wage growth “doesn’t necessarily presage a significant pickup in broader inflation measures, but it does require careful monitoring.” 

3. The Federal Reserve raises interest rates, as short-term rates rise more than long-term rates.
“We expect the Fed will increase interest rates this year,” Doll wrote in a prepared statement, further saying he believes “Treasury yields will advance, with the short end of the curve leading the way.” Doll said that the “bear market in bonds” began in July 2012, and warned that “it won’t take much of a rise in rates for bond investor to lose money.” When they begin to lose money, they will look for other places to invest their money, which Doll said will contribute to prediction No. 9: that U.S. equity mutual funds will see significant inflows during 2015. The Fed likely won’t be panicked into making significant rate rises, he said, since the three data points it focuses on—growth in real DGP, inflation and unemployment—are all in good shape. 

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4. The European Central Bank institutes a large-scale quantitative easing program.
Doll said that he would have liked to begin this prediction with the words “Finally, finally, finally” since ECB President Mario Draghi has been promising a European version of QE for years, though he was stymied by Germany, and thus the ECB’s balance sheet remained flat. However, Doll pointed out that the ECB doesn’t need “unanimity” in voting for quantitative easing, so Draghi could proceed — likely in the first quarter — even with a German ‘no’ vote.

5. The U.S. contributes more to global GDP growth than China for the first time since 2006.
The reasoning behind this prediction is that the U.S. economy is “doing better” while China’s is “slowing down.” The U.S. will contribute 38% in global GDP in 2015, while China will contribute 36%. In addition, the U.S. will experience faster growth in 2015 than the emerging market economies for the first time since 1999.

6. U.S. equities enjoy another good yet volatile year, as corporate earnings and the U.S. dollar rise.

The fundamentals of the equity markets are positive now, the Nuveen strategist said, and their likely direction is up for 2015. Doll expects an 8% rise for the S&P this year, and noted in passing that “for 100 years, the stock market has always performed well” in years ending in ‘5.’ Doll said the Q&A session following his prepared presentation that investors could expect a 5%-6% return on a diversified portfolio over the next 10 years, which when combined with an expected 2% inflation would yield a real return of 3%-4%. However, Doll said that 2015 could be “a year when we feel better about the economy than the markets” in contrast to 2014, when the opposite was true for most of the year. 

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7. The technology, health care and telecom sectors outperform utilities, energy and materials.
But Doll also argued that stock and bond selection will be “key” in 2015, and citing Sir John Templeton’s aphorism that bull markets are “born on pessimism, grow on skepticism, mature on optimism, and die on euphoria,” Doll said “we’re moving into the mature optimism phase.” He voiced “disappointment” on one of his 2014 predictions, that cyclical stocks would outperform defensive ones, but say he was proud of his third prediction for 2014, that U.S. equities would  “record another good year despite a 10% correction.” 

8. Oil prices fall further before ending the year higher than where they began.
“We have more supply” than was expected in oil, thanks to increased U.S. production, and because Saudi Arabia has not been “willing to play its usual ‘swing producer’ role.” But as far as investment opportunities go, Doll said he’d prefer consumers of cheaper energy to producers: “I’d rather own airlines.” 

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9. U.S. equity mutual funds show their first significant inflows since 2004.
As mentioned earlier, Doll believes that bond fund refugees will put some of their battered money into equity mutual funds, helping to offset the inflows growth enjoyed by ETF providers. One of the 2014 predictions that Doll got wrong was his assertion that active managers would outperform index funds. “That clearly wasn’t the case,” he said on Wednesday, but pointed out that the nine products he oversees at Nuveen did beat their benchmarks, “at an average of 300 basis points.” 

10. The Republican and Democratic presidential nominations remain wide open.
While Doll said he likes to avoid politics, he mentioned that in the most recent midterm elections, the “establishment wing” of the Republican party gained power at the expense of the Tea Party (in one of his half-wrong predictions made last year about 2014, Doll suggested that the GOP would consolidate its power in the House but fail to gain control of the Senate). He did make one political request, however. “I wish the U.S. would address” its high corporate tax rates, which puts it at a competitive disadvantage to its OECD counterparts, and would be beneficial for the markets and jobs.

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