As he has been doing for more than a quarter-century, Nuveen’s Bob Doll offers a look into his crystal ball for the year ahead — with a prediction for the 2016 elections.
Doll’s 10 predictions for 2016:
1. U.S. real GDP remains below 3% and nominal GDP below 5% for an unprecedented 10th year in a row. Doll notes that mediocre economic growth and relatively low inflation have been the hallmark of the current expansion, and doesn’t expect that will change in 2016, though never before in U.S. history has real growth stayed below 3% and nominal growth below 5% for 10 years in a row.
2. U.S. Treasury rates rise for a second year, but high yield spreads fall. Doll notes that Treasury yields have been rising unevenly for several years, while many forgot (or missed) the fact that 10-year Treasury yields bottomed at 1.43% in July 2012. Since then, rates have meandered irregularly higher as economic growth advanced and the Fed continued to make slow moves toward normalization. “Decent” economic growth and low defaults are seen as causing spreads to narrow in 2016.
3. S&P 500 earnings make limited headway as consumer spending advances are partially offset by oil, the dollar and wage rates. Doll says that the most significant headwind for equities in 2015 was constant pressure on earnings. That said, he doesn’t expect the dollar to climb as significantly as it did in 2015, and believes oil prices are bottoming. As such, these twin headwinds should lessen. Upward pressure on wages, however, could emerge as a new problem for earnings, while higher levels of consumer spending should provide modest revenue growth, and ongoing corporate buybacks should allow some degree of earnings growth. Doll says a notable risk is potential pressure on corporate profit margins, which he says should be watched carefully.
4. For the first time in almost 40 years, U.S. equities experience a single-digit percentage change for the second year in a row. Doll explains that although the average long-term annual rate of return for equities is in the high single digits, markets rarely deliver single-digit returns, and that it is especially rare for equities to do so in consecutive years (the last time in the U.S. was 1977 and 1978). He says a large upside or a large downside move (meaning a double-digit percentage gain or loss) is unlikely given the crosscurrents, and that while “fundamentals should improve somewhat in 2016, the Fed will be less friendly than in recent years.” Doll thinks that the bull market will likely continue, but the “easy” money has already been made, with earnings growth in 2016 likely to be the key variable to stock market returns.
5. Stocks outperform bonds for the fifth consecutive year. Doll says his “best guess” is that equities will be up modestly and the broad bond market will lag, weighed down by rising Treasury yields. He notes that while historically, equity prices have risen in the twelve months following the first Fed rate hike, they think “many areas of the bond market may struggle in the face of rising rates.”
6. Non-U.S. equities outperform domestic equities, while non-U.S. fixed income outperforms domestic fixed income. While generally speaking, U.S. equities and fixed income have outperformed their non-U.S. counterparts over the last few years, Doll says that, assuming global growth improves, the United States will likely surrender its years-long market leadership. While Doll says he thinks the United States is growing more robustly than the rest of the world, he thinks we may be near the peak of U.S./global divergence. He also said that the mantle for fastest growing emerging country has been passed from China to India.
7. Information technology, financials and telecommunication services outperform energy, materials and utilities. Free cash flow and unit growth will be keys to success in 2016, according to Doll, and - from a sector standpoint, he says they favor technology, (a sector with growth and value, domestic and international, and cyclical and defensive choices), financials (which should benefit from rising interest rates) and telecommunications services (a cheap, defensive sector).
8. Geopolitics, terrorism and cyberattacks continue to haunt investors but have little market impact. Doll notes that unsettled and skeptical investor attitudes are partially fed by the increase in terrorism and cyberattacks, as well as a growing list of geopolitical hot spots — and that these issues will likely remain in 2016. “Cyberterrorism has unfortunately become a way of life and will likely only increase as technology advances,” he writes.
9. The federal budget deficit rises in dollars and as a percentage of GDP for the first time in seven years. The federal budget deficit shrank by 70% from its 2009 peak by the end of 2015, a result of the sequestration following earlier budget impasses, as well as improved tax receipts from a growing economy, according to Doll. However, with the recently passed budget bill, he says, “the era of fiscal austerity is over.”
10. Republicans retain the House and the Senate and capture the White House. Doll acknowledges that, at this point, the outcome of the presidency, the Senate and possibly even the House, is in question, and that conventional wisdom (and poll numbers) suggests Democrats will retain the White House and have a good shot of capturing the Senate. “Nevertheless, we are going out on a limb (perhaps foolishly) and arguing for a Republican sweep,” Doll says. “The biggest question today is whether the Republicans can unify around an electable candidate.”
How did Doll’s 2015 predictions fare?
- U.S. GDP grows 3% for the first time since 2005. (Wrong)
- Core inflation remains contained, but wage growth begins to increase. (Correct)
- The Federal Reserve raises interest rates, as short-term rates rise more than long-term rates. (Correct)
- The European Central Bank institutes a large-scale quantitative easing program. (Correct)
- The U.S. contributes more to global GDP growth than China for the first time since 2006. (Correct)
- U.S. equities enjoy another good yet volatile year, as corporate earnings and the U.S. dollar rise. (Half correct)
- The technology, health care and telecom sectors outperform utilities, energy and materials. (Correct)
- Oil prices fall further before ending the year higher than where they began. (Half correct)
- U.S. equity mutual funds show their first significant inflows since 2004. (Wrong)
- The Republican and Democratic presidential nominations remain wide open. (Correct)
That’s six correct, two half-correct, and two wrong.
Note: Bob Doll is on the agenda for the 2016 NAPA 401(k) Summit, April 17-19, 2016, in Nashville, Tenn. Reserve your place today at http://napasummit.org/.
