Bob Doll’s 10 Post-Correction Predictions

After a 10% correction, where are the markets heading?

In his weekly commentary, Bob Doll, senior portfolio manager and chief equity strategist at Nuveen Asset Management, offered his thoughts on where he thinks the markets are going.

“For much of the past year, we have been cautioning that market volatility was too low and a consolidation or correction could come at any time,” Doll writes. “It appears it finally happened with a bang, driven primarily by inflationary pressures and a spike in bond yields.”

Last week, the Dow Jones Industrial Average experienced two separate 1,000 point declines, while the S&P 500 500 Index lost 5.1% for the week and has now declined 12% from peak to trough.

“While we think the worst of the correction may be behind us, messy market conditions may continue,” Doll writes. “And the long-term outlook is growing more complicated.”

Here are Doll’s 10 predictions for where the markets go next, after a 10% correction.

1. The recent spikes in volatility have been due in part to technical market factors. 

As markets started to fall, bid/ask spreads widened and highly leveraged low-volatility strategies were forced to unwind. In Doll’s view, this accelerated selling contributed to the panic-like conditions early in the week.

2. Rising inflation pressures could act as an ongoing headwind for stocks. 

According to Doll, improving wage growth was one catalyst that sparked the current correction. Doll expects this trend will continue putting upward pressure on inflation and bond yields.

“A combination of tax cuts and significant federal spending increases may accelerate these developments,” he adds.

3. Last week’s budget deal removes short-term uncertainty from the markets, but could cause longer-term issues. 

Doll says the spending package will add significant additional short-term stimulus and boost defense spending, which could cause an increase in both economic growth and inflation.

“It also makes the nation’s troublesome fiscal problems even worse,” he adds.

According to Doll, the spending package greatly reduces the risk of another budget fight. However, he adds, it also probably eliminates any chance of an infrastructure deal.

4. Despite the market turmoil, economic fundamentals remain sound. 

According to Doll, leading indicators and corporate earnings trends point to a continuation of the economic expansion and bull market.

“Warning signs to the contrary would include widening credit spreads and/or tightening financial conditions, but those have not materialized,” Doll says.

5. Corporate earnings continue to improve.