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‘Choppy and Frustrating’ Economy, But No Recession, Doll Predicts

Investment Management

While investors have been confronted with a range of contradictions, Bob Doll, Senior Portfolio Manager & Chief Equity Strategist with Nuveen Asset Management, told attendees at an April 8 workshop session at the 2019 NAPA 401(k) Summit to expect a “choppy and frustrating” 2019, but he does not foresee a looming recession. 

Providing his perspective around investment positioning and the economic outlook for the remainder of the year, Doll noted that he is “still scratching his head” as to why the stock market dropped 19% during the fourth quarter of 2018. He acknowledged that there are signs of the economy slowing. 

“But that begs the question: ‘When is next recession?’ And my response is, I have no idea,” Doll noted. In fact, he contended that no one has a clue, but he speculates that it could be in 2021. The reason, he explains, is twofold – because his “crystal ball” looks out 18 months and he doesn’t see any sign of recession, but at the same time, the vast majority of recessions start in the first year of a president’s term.  

As for the contradictions, Doll explained that there are three issues that have dominated economic dialogue that were wildly different during last year’s fourth quarter compared to this year’s first quarter. Consider that the Federal Reserve was considering raising rates “as far as the eye could see,” there were increasing threats of a trade war between the U.S. and China, and there was the emergence of a “black cloud” pointing to a recession, Doll explained. 

Now consider the dialogue today on those three issues. The Fed doesn’t appear to be threatening to raise rates anytime soon; we are weeks away from a trade deal with China; and the black cloud threatening a recession is gone and now all you see is “blue skies,” he noted. 

So what’s the truth? Doll suggested that the country is somewhere in between. In dissecting the three issues, he explained that the Fed has a new chair and is data driven, but because the data is mixed, they have no idea what they’re going to do next. Doll said he hopes the Fed will have a reason to raise rates, because that means we’ll have a good earnings report. 

As for trade, Doll believe the U.S. and China will sign whatever deal is put in front of them because they’re both desperate for a deal, which leads to concerns about what will be in the deal. The economy, meanwhile, shows no signs of recession, Doll noted, which comes back to his “choppy and frustrating” outlook.   

2019 Predictions

Turning to his top 10 annual predictions, Doll explained that he finished them on Christmas Eve day with bullish predictions, right as the stock market experienced a sharp decline. But fast forward to today and the stock market up 23%. “I don’t see a whole lot of upside, but it’s also hard to see a meaningful downside,” Doll stated, in noting that this was the fourth growth scare of this economic cycle. Yet, Doll explained, no matter which way he looks at his economic predictors, the country is currently in an “alpha world” and he does not see a “beta wave.” 

Here are Doll’s 10 predictions for 2019:


1. The U.S. expansion becomes the longest in history despite GDP slowing to a still-above-trend increase of 2% to 2.5%. Doll notes that the economic cycle is set to be the longest ever in the U.S. (as of June 30, 2019). But he further notes that “economic cycles and Bull Markets don’t die of old age, they get murdered by the Federal Reserve,” he declared, and as long as inflation remains low, he doesn’t see that as a threat. 

2. Unemployment bottoms in 2019 while wage growth continues to rise. Doll notes that lower unemployment should lead to increased wage inflation.

3. The Treasury yield curve flattens and credit spreads widen due to late cycle concerns. Here, he notes that credit spreads are near modern lows and suggests that some increases are likely in 2019. Doll also notes that there has been some chatter lately about inversions, but observes that the only ones that matter are the ones that last a long time. 

4. Corporate earnings growth estimates weaken for 2019 and 2020 as both revenue and profit pressures rise. Doll predicts that earnings growth is likely to be average at best in 2019. He suggests that profit margins may be pressured from multiple sources, including weaker sales growth as economic growth slows, higher dollar headwinds, late cycle headwinds and tariffs.

5. U.S. equities experience a positive return, but fail to reach record highs for the first time in 10 years. Here, Doll presents a so-called stock market “balance sheet”: 

  • Positives: still good, albeit slowing earnings growth; tax cuts/competitiveness; capital expenditures/productivity; while potentially rising, still low inflation and interest rates; valuation reset; skepticism/negativism.
  • Negatives: flattening yield curve; rising credit spreads; trade war uncertainty; growing federal budget deficit; market structure/liquidity concerns; end-of-cycle fears.

6. Non-U.S. stocks outperform U.S. stocks as the dollar sags.

7. The information technology, financial and health care sectors outperform utilities, REITs and materials.

8. The annual federal budget deficit approaches $1 trillion, a level unprecedented absent a recession. As to whether this matters, Doll says it does, but not yet and that it won’t until the country gets stuck and nothing budges. 

9. U.S. and global politics spark more market volatility as the cold wars within the U.S. and with China persist. In addition, Doll observes that the U.S. has become more divided, with polarization resulting from income inequality and immobility, generational warfare, geographical segregation, immigration and media polarization. 

10. A double-digit number of Democrats run for president while President Trump is challenged within his own party. Here, Doll notes that the first half of his prediction is already accurate, but the jury is still out on whether Trump will be challenged. 

As to what to do in this unpredictable environment, Doll offered the following thoughts:

  • Expect choppy markets, but a rally if no recession.
  • Focus more on alpha, less on beta.
  • Lean in when markets get hit, let some go on big moves up.
  • Diversify asset classes and geographies.
  • Focus on quality and free cash flow.
  • Watch inflation carefully.
  • Consider an absolute return strategy to complement market exposures.