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Doll Assesses his 2018 Predictions

A year ago, Nuveen’s Chief Equity Strategist & Senior Portfolio Manager, Robert C. Doll, predicted that 2018 will be “less perfect” than 2017, but still a solid year for investors. So how did he do?

For nearly 30 years, Doll’s annual predictions have taken a comprehensive look at the trends and issues he believes are positioned to meaningfully shape the economy and markets for the coming year. In the coming days, Doll will unveil his 10 predictions for 2019, but in the meantime, he takes a look back at the past 12 months and provides initial thoughts about what the next year will bring.

Overall, Doll submits that his 2018 predictions largely held true when it came to economic and earnings growth. But, he adds, the recent market volatility and equity selloff have made market conditions “even more less perfect” than expected.

Doll observes that the U.S. and global economies continued their expansion this year and corporate earnings soared, helping to propel stocks to new highs before markets experienced sharp volatility and a strong selloff in the last quarter. As for next year, he expects the issues driving market turmoil — trade worries, monetary policy uncertainty, slowing earnings and interest rate volatility — will likely remain, but adds that the “fundamentals continue to look mostly sound.”

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

Here, Doll notes that his initial predictions were out of consensus on the positive side when he made it, but it proved to be correct. While the first quarter was relatively slow, growth picked up considerably over the summer and, with inflation climbing modestly, nominal growth also advanced relatively strongly in 2018, he explains.

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

Rising trade protectionism remains a serious threat to the global economy and won’t be going away any time soon, Doll contends. In addition, the U.S./China trade dispute has been heating up and will probably represent a source of ongoing volatility, but so far the world economy has looked past these issues, he says in noting that his prediction was largely correct.

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

Both parts of this prediction came to pass earlier in the year, Doll observes. He notes that the unemployment rate fell to 3.7%, its lowest rate in 50 years, and wage growth rose from 2.5% to 3.1%, representing a new high for this economic cycle. Doll says he expects growth will be strong enough next year to keep the unemployment rate below 4%.

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

Here, Doll rates his prediction as “too early to call.” He notes that the 10-year Treasury yield topped 3% earlier in the year, but fell in the last quarter amid the broader “risk-off” trade. In addition, the curve flattened through most of the year and the short end of the curve actually inverted briefly in December. Doll further observes that the spread between the 2- and 10-year Treasury yields narrowed from 52 basis points to 16 by mid-December and thus remains positive. Doll doesn’t expect the curve will invert before the end of the year, but adds that he will hold off on scoring this one for now.

5. Stocks enjoy longest bull market in history but experience a 5+% correction after the longest period without one.

This prediction came true on Aug. 22, 2018, when this current bull market became the longest in history, Doll observes. He adds that the second half of this prediction occurred in February and again in October when stocks experienced their first significant corrections since 2016.

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

“Somewhat to our chagrin, this prediction has been our ‘most correct’ of the year,” Doll states, explaining that earnings growth has been strong, while stock prices had advanced modestly before falling toward the end of the year. In addition, at the time of his writing, he notes that the S&P 500 earnings per share growth stood at 22.6% year over year. The S&P 500 Index itself, in contrast, was down slightly, having returned -0.9%, Doll notes.

7. Equities beat bonds for the 7thconsecutive year for the first time in nearly a century.

Here, Doll says this was “comfortably correct” for most of the year, but recent market turmoil has called this one into question. At the time of his writing, he noted that stocks were both down by the same amount on a year-to-date basis. In addition, the S&P 500 Index and Bloomberg Barclays U.S. Aggregate Bond Index were both off 0.9% as of mid-December. Doll says he needs to wait for the market close on Dec. 31 to know for sure how this one fares.

8. Corporate capital expenditures increase at the expense of share buybacks.

Doll labels this prediction as half correct, noting that it is a “bit muddled.” He explains that capital expenditure levels have picked up and advanced 13% over the past year, which is boosting productivity and should help continue the economic expansion. At the same time, however, buybacks have soared this year, climbing 65%, Doll observes.

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

This prediction has trended in the right direction through 2018, Doll maintains. “A basket of our most-favored sectors is up 4.4%, while a basket of our least-favored is down -5.0%,” he states, adding that it would require a “massive disruption in markets over the next two weeks for this scoring to change.”

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

Doll observes that this political prediction was up in the air until the votes were counted, but in the end “the dominoes fell as we expected them to.” He suggests that the primary takeaway from the midterms is that “very little will be accomplished” in Washington over the next two years, which is not necessarily bad for the stock market.