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Bull Market Not Over but ‘Broader Correction’ Coming: Bob Doll

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As stocks bounce back from concerns over the success of President Donald Trump’s agenda in the wake of the failure of the Republican health care reform bill last week, equity strategist Bob Doll says there is a possibility of a correction in the air.

But that doesn’t mean the Nuveen executive has turned into a bear. “We may see a correction, but this bull market isn’t over,” he wrote in his latest weekly outlook.

In the short term, though, he sees internal market dynamics suggesting the start of “a broader correction.”

Risk assets, such as equities, have been resilient in recent months but are now shifting.

“Higher-risk areas such as small caps, cyclical sectors and some fixed income credit sectors have been flagging [as of Friday], which could be a precursor to a broader risk asset selloff,” he explained.

In addition, the positive momentum behind U.S. stocks could be shifting to non-U.S. markets.

“U.S. stocks have outperformed their international counterparts for years, but that trend may be changing. As non-U.S. economic and earnings growth improves, the leadership baton may be passing to other markets,” Doll stated.

Last week, equities had their largest one-week decline since the election, with the S&P 500 falling 1.4%.

“Small-cap stocks, financials and industrials fared the worst last week, with utilities and REITs gaining ground,” the Nuveen strategist said. “Treasury prices rallied for a second straight week, while the U.S. dollar fell for the third week.

Tax Reform

A week ago, Doll said that investors should focus more on Trump’s tax maneuvers rather than on health care and the budget.

This week, though, he is expressing some pessimism as to Trump’s ability to make tax changes happen.

“The GOP’s health care setback could signal additional political problems,” Doll said.

“From a political perspective, we think the key issue is whether the president will encounter similar problems with his tax reform agenda, which is likely to be as complicated as health care reform, if not more so,” he added.

On the bright side, Doll and the Nuveen team think some type of tax bill will get passed.

However, if political turmoil is ongoing – which is highly likely, many analysts say – higher risk, cyclical areas of the equity market could “likely remain under pressure.”

The strategist seems downbeat on spending, too. When it comes to infrastructure spending, Trump has “talked a lot” but failed to produce any specific plans, says Doll.

“At the same time, most Republicans appear disinclined to support more infrastructure initiatives without spending offsets,” he explained. “We think investors are too optimistic about prospects for additional spending measures and may wind up being disappointed.”

Other Thoughts

On the economic front, the Nuveen team is “relatively upbeat.”

It believes “fundamentals remain solid, including the labor market, manufacturing, housing, consumer spending and business investment,” Doll explained. “Even if sentiment drops a notch or two due to fading political optimism, we expect economic growth will remain on track.” Investors are not poised to overreact to negative news as they did last year, he points out.

Still, more volatility is expected as the post-election euphoria “continues to fade, Doll said. Nuveen advises investors to “ride out any near-term equity turbulence” …, as it sees equities outperforming bonds over the next year.

— Check out Forget Health Care, Focus on Tax Reform: Bob Doll on ThinkAdvisor.