(Related onThinkAdvisor: Ryan Pulls Bill to Repeal Obamacare; Says Tax Reform Now in Danger)
“The current political focus is on health care policy and the budget. Tax policy may be more important for markets,” said the Nuveen Asset Management chief equity strategist in a tweet ahead of House Speaker Paul Ryan’s move to pull the American Health Care Act from a vote on Capitol Hill on Friday.
“Volatility could rise in the coming months, but I think it makes sense to stick with overweights to stocks,” said Doll in another tweet. These are the thoughts the strategist has described in detail in his most recent weekly investor note and interview posted on Asset TV.
“Political observers have been focusing on the GOP’s health care plan and President Trump’s proposed budget. Both face an uncertain political future, but the president and Congress are clearly looking to significantly reorient the federal government,” Doll explained in his March 20 investor note.
“Both initiatives could shape economic growth and financial markets. But tax reform will likely have the greatest impact,” he added.
According to Doll, tax reform is “certain to address corporate tax repatriation,” which is estimated to be as high as $2 trillion, roughly the current amount of foreign income kept overseas. “Enacting a plan that returns this money to the U.S would allow the government to tax these profits and produce revenue that could help pay for other tax cuts or infrastructure spending,” he said.
As was the case with health care reform, corporate tax changes are not guaranteed but Doll sees the chances of shifts in this policy area as “high.”
“Investors are anticipating an increase in tax revenues from repatriation that could fuel economic growth. If any such plan is smaller in scope than investors anticipate, it could present downside market risks,” he cautioned.
The Nuveen team knows that equities have their weak spots today.
“We have been suggesting for some time that the broader equity market may be slightly overextended and could be due for a setback or correction,” Doll said.
Thus, the Nuveen team suggests investors approach stocks “cautiously in the near term, but at the same time, the 6- to 12-month outlook appears moderately constructive.”
Higher-risk areas of the market include small caps, cyclical sectors and some fixed-income credit sectors, he points out, adding that they “have been flagging to various degrees.”
Overall, investors may need “to weather some additional near-term volatility,” Doll says. The Nuveen team, though, continues to believe in overweight positions in equities “for the long term.”
Other Stock Analysis
More those looking at where Doll remains positive on the market upside, the strategist says the spoils are poised to go to those making the best bets.
“We’ve said that where you are [in the market] is more important than if you are in or it or not,” he explained in an interview. This is because the high correlation across all stocks has been falling, he points out.
“That gives one the opportunity to add value by being in the right [stocks] rather than being in the wrong ones,” the equity strategist explained.
The key to performance these days is where the company gets it earnings from, in his view.
“We only invest in U.S. comps that get most of their business in the U.S.,” Doll explained, adding that the Nuveen group is underweight large multinationals and mega-cap firms.
“The former do not have to worry about slow growth overseas and the stronger dollar,” the strategist said.
“The valuation of mid-cap [stocks] is still interesting,” Doll said, adding that this group didn’t do too well last year but is “now is the sweet spot.”
Nuveen continues to focus on value stocks.
As for the health care sector, which continues to attract Trump’s attention on Twitter and elsewhere, it is down in value and “is one of the only sectors with cheaper valuations.”
Given these lower prices and the “demographic tailwinds” behind it, Doll says, it’s worth considering.
He is also fairly bullish on the financial sector, which could be boosted by regulatory and other reforms, economic growth and higher interest rates.
“No sector comes closer to benefiting from these three things,” Doll stated.
Nuveen’s portfolio is positioned for “a modest up market and a modestly improving economy, somewhat better earnings and continued progress — as bumpy as it might be around legislation, fiscal policy, tax cuts and tax reform,” the strategist said.
— Check out Bob Doll’s 10 Predictions for 2017 on ThinkAdvisor.