Doll Sees a ‘Less Perfect Year’ Ahead

A year ago, Nuveen’s Senior Portfolio Manager and Chief Equity Strategist Robert C. Doll predicted that optimism surrounding the Trump agenda was high, with investors expecting tax reform, increased infrastructure and military spending and a rollback of regulations. What does he see for the year ahead?

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. Here are his predictions for 2018:

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

Doll notes that the negative impacts from the financial crisis have finally moderated, and this, combined with a significant corporate tax cut and a rising capacity utilization rate, should lead to a return to somewhat more normal growth. He explains that late in 2017, the Leading Economic Indicator series finally rose above its pre-recession level – something that in the past has led to, on average, six more years of economic expansion, with the shortest additional expansion period being four years.

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

Doll notes that in an expansion, imports and exports are among the fastest growing segments of the global economy, but that anti-trade sentiment in the United States and elsewhere has held this back.

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

Doll expects the unemployment rate to drop below 4%, and that wages will continue to rise as a “shortage of workers, robust corporate profits and generally strong corporate conditions manifest themselves.”

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

Doll sees a rise in inflation as the biggest threat to the financial markets in 2018. “It is important to note that we expect a flattening yield curve, with the Fed raising rates faster than the curve moves up in yield, but a flattening curve is not a good predictor of equity prices,” he notes.

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

While anticipating a continuation of the bull market on its way to becoming the longest in history, Doll also expects that the uninterrupted strings of advances to fade and occasional pullbacks as interest rates and inflation rise. “Volatility is likely to rise, but we still expect stock markets to make modest gains,” he says.

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

Doll notes that U.S. stock returns have outpaced earnings in each of the last six years, the longest streak on record. The last time equity appreciation exceeded earnings growth for a sustained period of time was 1995-1999. He expects that streak to end in 2018. “Earnings expectations for 2018 are now high – justifiably so – but in our view they will be difficult to exceed,” Doll notes.

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

“Equities may be vulnerable to pullbacks in response to rising bond yields, but a major decline in stock prices looks unlikely as long as growth and earnings are improving,” Doll writes.

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

Doll writes that “chronic underinvestment in capex this business cycle, strong profitability, the low cost of capital, improved economic confidence, lowered corporate tax rates, the repatriation of foreign earnings and the expensing of capex in the new tax bill will combine to show an increase in business fixed investment by maybe 6% or more in 2018.” He also says that tax changes that limit interest expense deductions should curtail share buybacks.

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

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

“The long list of Democrats up for reelection in states where President Trump won by a wide margin provides some hope for the Republicans that they will retain the Senate, but the poor polling of the president and the Republican Congress means the Democrats may well retake the House,” writes Doll. “For markets, it probably means little, if any, significant legislation after the tax bill.”

Remember that in 2016 he predicted the GOP’s retention of the House and Senate and its capture of the White House.

How does Doll evaluate his 2017 predictions? We’ll take a look on Monday.

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