Bob Doll's Ten Market Predictions For 2016

Jan 7 2016 | 10:37pm ET

Well known market strategist Robert Doll has published his list of ten predictions for the new year amidst steep declines in global markets. 

Doll, who is senior portfolio manager and chief equity strategist for New York-based multi-asset money manager Nuveen Asset Management, fully expects 2016 to be rocky, but also sees reasons for optimism.

Doll has published his year-ahead expectations annually for more than 25 years, and longtime market observers have come to respect his deep, thorough and often optimistic look at the key factors he believes will meaningfully shape market and economic trends in the coming 12 months.

As usual, Doll’s 2016 framework begins with a look back at 2015, a year he characterizes as “mostly unrewarding” and filled with anxiety and uncertainty. However, while headwinds were strong for equities, the fundamental issue was one of generally weak corporate earnings. The combination of a strong U.S. dollar and falling oil prices acted as a drag on revenues and earnings, particularly for energy, materials and some industrial companies, yet the benefits of lower oil prices have to date only marginally lifted earnings from traditionally energy-sensitive segments of the market.

Doll reiterated that this remains the least-believed economic recovery and bull market in recent memory. The S&P 500 Index has tripled in value since the end of the financial crisis, yet fear and uncertainty, fueled by the mediocrity of the current economic cycle and geopolitical uncertainly, remain. Nonetheless, according to Doll, the U.S. economy continues to improve and has witnessed healing in the housing and banking sectors, a return to all-time-high household net worth, a refinanced corporate and household sector, dramatic declines in unemployment and a massive decline in the federal budget deficit.

Against this backdrop, here are Doll’s Ten Predictions for 2016, with his thinking on each: 

1. U.S. real GDP remains below 3% and nominal GDP below 5% for an unprecedented tenth year in a row. 

Mediocre economic growth and relatively low inflation have been the hallmark of the current expansion. We don’t expect that will change in 2016. Never before in U.S. history has real growth stayed below 3% and nominal growth below 5% for 10 years in a row. Yet, we think this will happen in 2016. Growth should remain modest, and while inflation may tick higher, it should do so slowly. From a global perspective, the U.K. and the Eurozone should be positive contributors while Japan, China, and commodity-based economies will likely create a drag on growth.

2. U.S. Treasury rates rise for a second year, but high yield spreads fall.

Treasury yields have been rising unevenly for several years. Many forget (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. High yield spreads expanded near the end of 2015, especially in energy and related areas. We think decent economic growth and low defaults will cause 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.

The most significant headwind for equities in 2015 was constant pressure on earnings. We don’t expect the dollar to climb as significantly as it did in 2015, and believe oil prices are bottoming. As such, these twin headwinds should lessen. Upward pressure on wages, however, could emerge as a new problem for earnings. Higher levels of consumer spending should provide modest revenue growth, and ongoing corporate buybacks should allow some degree of earnings growth. A notable risk to our view is potential pressure on corporate profit margins, which 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.

Although the average long-term annual rate of return for equities is in the high single digits, markets rarely deliver single-digit returns. And it is especially rare for equities to do so in consecutive years. In fact, this last happened in the United States in 1977 and 1978. We think a large upside or a large downside move (meaning a double-digit percentage gain or loss) is unlikely, given the crosscurrents. In particular, while fundamentals should improve somewhat in 2016, the Fed will be less friendly than in recent years. Similarly, arguments exist on both sides of the valuation and sentiment discussions. In our view, the bull market will likely continue, but the “easy” money has already been made. Earnings growth in 2016 is likely to be the key variable to stock market returns.

5. Stocks outperform bonds for the fifth consecutive year.

Our best guess is that equities will be up modestly and the broad bond market will lag, weighed down by rising Treasury yields. Historically, equity prices have risen in the twelve months following the first Fed rate hike. In contrast, we think many areas of the bond market may struggle in the face of rising rates. Accordingly, we favor an overweight stance in equities versus bonds, and would be especially wary of U.S. Treasuries.

6. Non-U.S. equities outperform domestic equities, while non-U.S. fixed income outperforms domestic fixed income.

U.S. equities and fixed income have generally outperformed their non-U.S. counterparts over the last few years. Assuming global growth improves, the United States will likely surrender its years-long market leadership. Today, we think the United States is growing more robustly than the rest of the world, but we may be near the peak of U.S./global divergence. Additionally, with the Fed raising rates and many other regions remaining in easing mode, U.S. fixed income may struggle on a relative basis. On a related note, we believe 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.

As we saw in 2015, we think free cash flow and unit growth will be keys to success in 2016. From a sector standpoint, we 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). We remain cautious on the deeper cyclical areas, and low energy prices should weigh on the energy and materials sectors. As for utilities, this proxy for the bond market will likely struggle as rates rise. We also have a modest preference for large caps over small caps and growth styles over value (our style preferences may shift if global economic growth broadens.)

8. Geopolitics, terrorism and cyberattacks continue to haunt investors but have little market impact.

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. Sadly, these issues will likely remain in 2016. The human cost of these issues is heartbreaking, but experience shows that any market impacts will likely be small and temporary. Cyberterrorism has unfortunately become a way of life, and will likely only increase as technology advances.

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. This drop was as a result of the sequestration following earlier budget impasses, as well as improved tax receipts from a growing economy. With the recently passed budget bill, the era of fiscal austerity is over. Rising deficits and debt present long-term issues, but there is a silver lining: Increased spending means the federal government should contribute positively to economic growth after years of being a drag.

10. Republicans retain the House and the Senate and capture the White House.

At this point, the outcome of the Presidency, the Senate, and possibly even the House, is in question. 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. The biggest question today is whether the Republicans can unify around an electable candidate.

Risks to Doll’s 2016 outlook? Slowing growth in China, commodity pressures, policy errors by central banks, widening credit spreads and unpredictable geopolitical developments, he points out.

Nuveen Investments markets a wide range of specialized investment solutions that provide investors access to capabilities of its high-quality boutique investment affiliates. In total, Nuveen Investments, parent company of Nuveen Asset Management, had approximately $220 billion in AUM as of September 30, 2015.


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