Bob Doll, chief equity strategist at Nuveen Asset Management, says 2018 will be a good year for the stock market but not a great one like the year that just ended, which was “perfect” from an investment perspective.

The economy grew, unemployment fell to a 20-year low, global growth expanded, inflation was tame and the S&P 500 gained almost 20%, ending higher every month, for the first time ever, says Doll.

(Related: Bob Doll Sees Stocks Rising; Scores His 10 Predictions)

“Stocks basically went up almost all the time … Earnings growth powered stocks higher … Bond returns were also better than expected.”

Doll offered his Ten Predictions for 2018 Thursday but first reviewed the accuracy of his Ten Predictions for 2017: Five correct, one wrong and four partially correct. The sole error: predicting the 10-year Treasury yield would reach 3%. It ended 2017 at 2.4%, slightly below where it began.

Looking ahead to 2018, Doll says, “as long as economic growth and earnings are relatively good (which they are likely to be), equities should be fine, but the gains won’t be as strong and smooth as they were in 2017. “We’re moving from a smooth gallop to a bumpy grind.”

Here are Doll’s Ten Predictions for 2018:

 Prediction #1:U.S. real GDP reaches 3% and nominal GDP 5% for the first time in over a decade.

“If we get to these numbers will be a much more normal environment, which we haven’t seen in quite some time,” says Doll. He expects unemployment will continue to fall, inflation will remain contained and growth will be supported by the tax cuts that were just enacted by Congress. He doesn’t, however, expect much additional “pro-growth legislation.”

The last time major tax cuts were enacted, in 1986, trucking, a big barometer of economic activity, picked up on a sustainable basis, and he expects similar gains this time around.

Doll says growth will decelerate moving into 2019 and inflation and rates will be low but maybe rising.

Prediction #2:

Despite ongoing protectionism, the global expansion continues with the fewest countries in recession in history.

“The global economy is doing very well. … The world has never been in better shape,” says Doll. That’s highly unusual when global trade has remained fairly flat, says Doll. “Synchronistic global growth is achieved usually when foreign trade is growing.” could hold growth back. The biggest downside risk to this prediction is protectionist policies, which Doll suggests investors should be watching closely.

Prediction #3:

Unemployment falls to the lowest level in nearly 50 years as wage growth is the highest since the Great Recession.

Doll is predicting that the U.S. unemployment rate will end 2018 at 3.75%, down from 4.1% currently, with a further decline to 3.5%, the low reached in 1969, possible thereafter.

As more people get work, wages will rise, growing at 3% by year-end, up from the current 2.5% rate, says Doll. “Historically when you get to 5% unemployment, wage growth picks up to 4%.” With unemployment well below that level, wage growth has been “rather quiet.” He counsels investors to “keep your eye on this one because beyond 3%, we begin to have issues with corporate profitability.”

Prediction #4:

The yield curve flattens (but does not invert) as the yield on the 10-year Treasury reaches 3% for the first time since 2014.

Yields will move higher because the accommodative policies of central banks is unwinding now or will be in the not-so-distant future, says Doll. The Federal Reserve has already ended its quantitative easing asset purchases, and the European Central Bank and Bank of Japan are in the process of ending theirs, says Doll. “Central banks are moving slowly but surely … from easing to normalizing to eventually tightening.”

Although the 10-year Treasury yield rose to 3% during 2014 — in early January — it hasn’t ended a year at or above 3% since 2013.

Prediction #5:

Stocks enjoy longest bull market in history but experience a correction of 5% or more.

The current bull market is poised to become the longest in history if it continues into August and the second largest if the S&P 500 tops 2,863, says Doll. It hasn’t had a 3% or 5% pullback in 12 months, which is “unusual, abnormal and unlikely to continue,” says Doll.

But he says the bull market can continue if earnings outlook remains solid, interest rates and inflation are contained, technical warning signs are absent and volatility is low. It’s very unusual for a bull market to end before there’s a pickup in volatility, says Doll. In addition, the current bull market has a lot more breadth than bull markets before the dot-com craze and financial crisis.

More than three-quarters of stocks have rallied in the current bull market compared with about half during those two previous ones. “Bull markets do not die of old age,” says Doll, but he warns that 2018 is a midterm election year, which is not traditionally a strong one for stock markets.

Prediction #6:

U.S. equity returns lag earnings growth for the first time in six years, the longest streak in decades.

Doll has a year-end target of 2,800 for the S&P 500, which is equivalent to a 7% return. It assumes a rise in interest rates, which would depress bond prices but still leave cash return near zero. In that scenario, stocks would remain the “asset of choice.”

He estimates a P/E earnings for the S&P 500 of 19x $150 estimate post-tax cut, falling to 18x in 2019 as earnings estimate rises to $156.

“Stocks will go ill go up less than earnings because investors have gotten more bullish,” says Doll, adding that analysts’ earnings projections for the next three to five years are the highest in a decade and unlikely to be realized and low volatility years are likely to be followed by high volatlity ones.

Prediction #7:

Equities beat bonds for the seventh consecutive year for the first time in nearly a century.Stocks will beat bonds in 2018 because they will rise some while bonds decline, says Doll. That hasn’t been the case over the past six years. Stocks rose an average 16% per year while bonds rose 2.5%. Rising rates, which hurt bonds, will eventually impact stocks but not necessarily right away, says Doll, stating that there have been many times that rates rose and so did stock prices.

Prediction #8:

Corporate capital expenditures increase at the expense of share buybacks. There are many reasons corporate capital spending should increase this year, according to Doll: chronic underinvestment, strong profitability and rising confidence among corporate CEOs, which are not new. What is new this year is the tax cut bill, which buttresses those reasons and provides some more.

It slashes the corporate tax rate, allows for repatriation of foreign profits and allows companies to immediately expense capital spending while it limits the deduction for debt interest. That makes debt-financed share buybacks less attractive compared with fully deductible capital spending.

Prediction #9:

Telecommunication services, inflation, technology and health care outperform utilities, energy and materials.

Doll is overweight the first three and underweight the rest.

Telecom and health care are defensive plays while technology is attractive because of excellent earnings, global exposure, capital spending increases and strong balance sheets, says Doll.

Within telecom he favors large network providers, and within health care, biotech and managed care. Among technology stocks, Doll likes software, credit cards and stocks whose P/Es are not “super high.”

He favors value over growth, cyclical over defensive and large-cap over small. (He is a large-cap portfolio manager.)

Prediction #10:

Republicans lose the House, retain the Senate and further distance themselves from President Trump.

Republicans lose the House, retain the Senate and further distance themselves from President Trump.

It’s common that the incumbent party loses seats during midterm election years, of which 2018 is one. Currently Democrats lead Republicans on the generic congressional ballot by more than 10 points, says Doll.

He says they have a better chance of retaking the House because they need just 24 additional seats there. In the Senate, the Democrats need just two but they will be defending 25 — including six where Trump won by more than 15%. Republicans will be defending only 10 Senate seats, and Trump won by less than 5% in just two of them.

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