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Bob Doll’s 10 Predictions for 2016

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It’s been a rocky start to the year for investors. What else lies ahead?

Plenty, according to Robert C. Doll, the chief equity strategist and senior portfolio manager for Nuveen Asset Management, who has issued his popular yearly predictions for more than 25 years.

His outlook is an important base for the portfolios he and his team run in the Nuveen Large Cap Equity Series, according to Nuveen.

“Doll’s 10 Predictions have long served as thoughtful guides to issues investors should consider as they work with their financial advisors to build strong long-term investment portfolios,” the group said in a statement.

Last year, of course, included less-than-stellar returns and lots of anxiety and uncertainty. “Most asset classes struggled and a number of macro shocks dominated the financial headlines,” according to Nuveen.

“From another Greece-induced sovereign debt crisis, a sharper-than-expected slowdown in China and the long-awaited Fed liftoff, to the late-year meltdown in commodity prices, continued terrorism threats and a bizarre U.S. political and election backdrop, it is understandable that investors may find themselves rightly asking, ‘What just happened here?’ ” the group explains.

Overall, weak corporate earnings were the main factor behind equities’ lackluster progress in 2015, it adds. “The combination of a strong U.S. dollar and falling oil prices acted as a drag on revenues and earnings.”

Still, the S&P 500 Index has tripled in value since the Great Recession came to an end.

“Despite the negativity and uncertainty of 2015, which proved in abundance, the equity markets managed to eke out modest gains with several other bright notes to the year. The U.S. economy continues to improve and has witnessed (1) healing in the housing and banking sectors, (2) a return to all-time-high household net worth, (3) a refinanced corporate and household sector, (4) a dramatic decline in unemployment and (5) a massive decline in the federal budget deficit,” Nuveen explains.

Read on for Doll’s 10 predictions for 2016:

U.S. real GDP remains below 3%

1. U.S. real GDP remains below 3%; nominal GDP below 5% (for an unprecedented 10th year in a row).

The current expansion has been marked by mediocre economic growth and relatively low inflation, says Doll, who doesn’t expect that to change this year. “Never before in U.S. history has real growth stayed below 3% and nominal growth below 5% for 10 years in a row. Yet, we think this will happen in 2016,” he writes.

“We expect growth will continue to be modest. While inflation may tick higher, it should do so slowly,” adds Doll.

Globally, the U.K. and eurozone should be “positive contributors,” he says. Japan, China and the commodity-based economies of the world will likely “create a drag on growth.”

U.S. Treasury rates rise for a second year

2. U.S. Treasury rates rise for a second year; high yield spreads fall.

Treasury yields have been rising unevenly for several years, but 10-year Treasury yields bottomed at 1.43% in July 2012.

Since then, rates have moved up irregularly with economic growth, “and the Fed continued to make slow moves toward normalization,” Doll explains. “High yield spreads expanded near the end of 2015, especially in energy and related areas.”

Overall, he and the Nuveen team expect that “decent economic growth and low defaults will cause spreads to narrow in 2016.”

S&P 500 earnings make limited headway

3. S&P 500 earnings make limited headway; consumer spending advances are partially offset by oil, the dollar and wage rates.

As mentioned earlier, the performance of equities has been limited by earnings pressure.

Though Doll’s team doesn’t anticipate the dollar to climb as significantly as it did last year, the group believes oil prices “are bottoming.” Thus, these twin headwinds working against equity “should lessen.”

However, upward pressure on wages might emerge as a new problem for corporate earnings.

Overall, Doll expects higher levels of consumer spending to provide “modest revenue growth.” Meanwhile, corporate buybacks could allow “some degree of earnings growth.”

Nonetheless, “a notable risk to our view is potential pressure on corporate profit margins, which should be watched carefully,” Doll cautions.

U.S. equities have single-digit percentage change

4. U.S. equities have single-digit percentage change (for a second year in a row).

The average long-term annual rate of return for equities is in the high single digits, according to the Nuveen portfolio specialist, and the markets “rarely deliver single-digit returns.”

It is especially rare for equities to move up at the single-digit level consecutively. This last happened in the United States in 1977 and 1978, he points out.

“We think a large upside or a large downside move (meaning a double-digit percentage gain or loss) is unlikely given the crosscurrents,” Doll explains.

He sees fundamentals improving slightly this year, but the Fed will be “less friendly” than in recent years.

Overall, though, Nuveen’s equity team says the bull market should continue.

The “easy money,” however, has already been made, and earnings growth is likely to be the key variable to stock market returns in 2016.

Stocks outperform bonds for the fifth consecutive year

5. Stocks outperform bonds for the fifth consecutive year.

Our best guess is that equities will be up modestly, and the broad bond market will lag, weighed down by rising Treasury yields,” explains Doll.

Though stock prices traditionally have risen in the 12 months after the first Fed rate hike, he and his colleagues see many parts of the bond market facing a struggle in the face of rising rates.

“Accordingly, we favor an overweight in equities versus bonds, and would be especially wary of U.S. Treasuries,” the portfolio manager states.

Non-U.S. equities outperform domestic equities

6. Non-U.S. equities outperform domestic equities; non-U.S. fixed income outperforms domestic fixed income.

In general, U.S. equities and fixed income have outperformed their non-U.S. counterparts over the last few years.

Get ready for a change: “Assuming global growth improves, the United States will likely surrender its years-long market leadership,” explains Doll.

Though the United States is growing more robustly than the rest of the world, we may “be near the peak of U.S./global divergence,” he adds.

Furthermore, as rates rise in the U.S. but not elsewhere, U.S. fixed income “may struggle on a relative basis.”

As for growth in the emerging markets, Doll’s team at Nuveen believe the mantle for the fastest-growing economy has been passed from China to India.

Tech, financials & telecom outperform energy, materials & utilities

7. Tech, financials & telecom outperform energy, materials & utilities.

Doll and his team see free cash flow and unit growth as keys to success in 2016, as they were in 2015.

From a sector standpoint, they favor technology – a sector “with growth and value, domestic and international, and cyclical and defensive choices, along with financials” – set to benefit from rising interest rates, and telecommunications services – viewed as “a cheap, defensive sector.”

“We remain cautious on the deeper cyclical areas, and low energy prices should weigh on the energy and materials sectors,” explains the equity strategist.

Utilities — seen as a proxy for the bond market — are poised to struggle in a rising-rate environment.

“We also have a modest preference for large caps over small caps and growth styles over value,” states Doll, adding that Nuveen’s style preferences could shift if global economic growth broadens.

Geopolitics, terrorism & cyberattacks haunt investors, but with little market impact

8. Geopolitics, terrorism & cyberattacks haunt investors, but with little market impact.

“Unsettled and skeptical investor attitudes are partially fed by the increase in terrorism and cyberattacks, as well as a growing list of geopolitical hot spots,” according to Doll.

While these issues are likely to continue to “haunt investors” this year — and the human cost of these issues is heartbreaking, he says — experience shows that any market impacts from these challenges are “likely [to] be small and temporary.”

Cyberterrorism, in his view, is now “a way of life,” and we can expect it to “only increase as technology advances.”

Budget deficit rises

9. Budget deficit rises (in dollars and as percentage of GDP)

In 2015, the federal budget deficit shrank by 70% from its 2009 peak.

This decline resulted from sequestration following earlier budget impasses and from improved tax receipts tied to the growing U.S. economy.

“With the recently passed budget bill, the era of fiscal austerity is over,” says Doll. For the first time in seven years, there will be a rise in the deficit and growing debt.

Though this raises long-term issues for the nation, there is “a silver lining,” he adds: “Increased spending means the federal government should contribute positively to economic growth after years of being a drag.”

Republicans keep House and Senate

10. Republicans keep House and Senate, win the White House.

Doll admits that “at this point, the outcome of the presidency, the Senate and possibly even the House, is in question.”

He also acknowledges that both conventional wisdom and poll numbers suggest that the Democrats will retain the White House and have “a good shot” of taking the Senate.

Still, the group has decided to go “out on a limb (perhaps foolishly)” and call for a Republican sweep.

“The biggest question today is whether the Republicans can unify around an electable candidate,” Doll says.

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