Robert Doll, chief equity strategist at Nuveen Asset Management, says that despite continued uncertainty about global economic growth, monetary policy and financial market valuations, there are more reasons now for investors to be positive than negative about financial markets, especially stocks.
In his latest weekly investment commentary and midyear outlook, Doll explains that the U.S. economy is growing, though modestly, helped by firming oil prices and improvements in manufacturing; corporate earnings are improving – Doll says earnings hit bottom in the first quarter, ending the so-called earnings recession; and the banking system is well capitalized. In addition, he notes that rising geopolitical risks have had a limited economic and financial impact on the U.S. so far.
Moreover, writes Doll, the record high first reached in the S&P 500 on July 11 — 14 months after the previous high — bodes well for the U.S. stock market. It marks the fifteenth time that the index took 12 months or more to reach a new high, and in 14 out of those 15 times the index was even higher a year later, with gains ranging from 3.1% to 18%, according to Doll.
Doll manages three equity funds for Nuveen, supported by 17 fundamental analysts and three quantitative analysts: Nuveen Large Cap Core Fund (NLCIX), Nuveen Core Dividend Fund (NCDIX) and the Nuveen Equity Market Neutral Fund (NIMEX). All three funds just celebrated their three-year anniversary, which is requirement for Morningstar to rate them, and each fund received a four-star rating.
Doll reviewed the 10 Predictions he made for 2016. Five are correct so far; two are wrong and three are too early to call. Here’s his scorecard:
What Bob Doll Got Right (So Far)
U.S. Real GDP
Doll predicted that U.S. real GDP would remain below 3% in 2016 while nominal GDP stays under 5% for an unprecedented tenth year in a row.
The economy grew at real rate of only 1.1% in the first quarter and Doll expects growth will remain modest through the year. “It is hard to imagine real growth exceeding 3% or nominal growth averaging over 5%.”
S&P 500 Earnings
Doll still predicts a modest recovery in corporate earnings this year, as the drag from falling oil prices and the strengthening dollar fades. Oil prices have recovered from the lows of earlier this year, near $30 a barrel, and are now trading near $45 a barrel, below a recent high just above $50 a barrel.
The U.S. dollar remains strong against many major foreign currencies, and the Bloomberg dollar index recently reached a seven-week high, propelled by renewed speculation of a Fed rate hike before year end.
Doll cites consensus expectations of $117 earnings per share for the S&P 500 in 2016 — just slightly below the actual $118 per share seen last year.
Single-Digit Growth in the S&P 500
At the beginning of this year, Doll forecast a year-end target of 2,150 for the S&P 500. In early trading today, the S&P 500 and Dow once again set record highs at 18,574 and 2,167, respectively.
Doll acknowledges that the S&P 500 is now trading above the year-end prediction he made in January, but he is “not inclined to change it.” He tells ThinkAdvisor, however, that the S&P 500 could possibly end the year as high as 2,250. That would be a double-digit gain of 10% since the S&P 500 ended 2015 at 2,044.
“It’s tough to make a case for a strong equity market in the next six months,” writes Doll. “But it’s equally hard for us to see how prices could fall dramatically.” He expects the second half action in U.S. stocks will look a lot like the first half – volatile but range-bound.
Geopolitics, Terrorism and Cyberattacks Continue but Have Little Market Impact
Even the Brexit vote, whose results were unexpected, has had limited market impact so far, along with terrorist attacks abroad and the massacre in Orlando, Florida, writes Doll. Brexit, however, will mean a recession in the U.K. and will affect the eurozone economy. For the U.S., however, it’s another reason to favor outperformance of investment-grade bonds.
Federal Budget Deficit Increases
Doll had written that the U.S. federal budget deficit would rise in absolute terms (dollars) and as a percentage of the GDP for the first time in seven years.
He cites the Congressional Budget Office’s latest deficit projections for 2016 of a $534 billion deficit, which is $100 billion above the deficit for 2015, but $10 billion less than the CBO projected at the beginning of the year. The increase pushes the deficit to 2.9% of GDP, up from 2.5%.
What Doll Got Wrong
U.S. Stocks Did Not Outperform Bonds
Doll had predicted that U.S. stocks would outperform bonds, but at the end of the second quarter stocks were trailing bonds – up 3.8% versus 5.3% for the Barclays U.S. Aggregate Bond Index. Doll says that pattern could reverse if the economy improves slightly so that earnings rise — helping to boost stocks — as well as yields, hurting bonds.
Tech, Financial and Telecom Stocks Did Not Outperform
Doll had predicted that the information technology, financial and telecom sectors would outperform energy, materials and utilities this year, but so far the financial and technology sectors are the only two sectors that have posted losses. He notes that his basket of favored sectors rose 7.1% in the first half while his least-favored sectors gained more than twice that – up 15.7%.
But given those performances, Doll says it’s time to trim utilities, telecom, energy, materials and consumer staples and to overweight technology, consumer discretionary and selected industries such as health care.
He favors value stocks over momentum trades, companies with positive free cash flow, strong unit growth and U.S.-focused over multinationals. He also maintains an overweight in equities generally.
Too Early to Call
Foreign Stocks to Outperform U.S. stocks
Doll had predicted that foreign equities and foreign bonds would outperform U.S. stocks and U.S. bonds. So far this year U.S. stocks have outperformed foreign stocks, but U.S. bonds have underperformed foreign bonds. The Barclays Global Aggregate Bond Index excluding U.S. bonds is up almost 12% for the first half.
Republicans Retain the House and Senate and Capture the White House
It was never the case that Doll could be proven right or wrong with this call by midyear since the November elections are still months away. He admits that the latest polls are “trending in the wrong direction for this prediction,” but notes that “four months is an eternity in politics [and ] if we’ve learned anything this year, it is to expect the unexpected.
Like many market strategists, Doll says the markets prefer a mixed government in the U.S. – with one party in charge of the White House while another party or both parties are in charge of one or both houses in Congress. “Markets like continued divided government,” says Doll.
U.S. Treasury Rates Rise For a Second Year; High Yield Spreads Narrow
Doll says Treasury rates will rise from current lows but may end the year below last year’s closing yields because of global economic weakness and negative rates on overseas bonds.
“Yields will drift higher from here, because of improvement in U.S. nominal growth and rising wages, but not move much higher,” says Doll. He still expects that high yield bonds will remain more attractive than Treasuries even though high yield spreads have narrowed close to 70 basis points.
— Related on ThinkAdvisor:
- Bob Doll’s 10 Predictions for 2016
- Bob Doll: Don’t Worry About China; Worry About Corporate Taxes
- Which Bob Doll Economic Predictions for 2015 Were Right or Wrong?