Last updated: 12:16 / Monday, 5 January 2015
Nuveen Investments

Bob Doll on 2015: Investor Sentiment Moves from Skepticism to Optimism

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Bob Doll on 2015: Investor Sentiment Moves from Skepticism to Optimism
  • This means 2015 should result in another decent year for U.S. equities
  • The United States is likely to experience a surprisingly resilient economy in the coming year and contribute more to global GDP growth than China for the first time since 2006
  • Although equities are no longer a bargain, they should outperform cash, bonds, inflation and commodities; with average annual returns somewhere in the mid-to-high single digit range
  • The ECB institutes a large-scale quantitative easing program: one the predictions

Robert C. Doll, Senior Portfolio Manager, Chief Equity Strategist at Nuveen Asset Management, has released his popular Ten Predictions for the year ahead.

2014 was a year of transition and (mostly) positive surprises: U.S. equities and bonds performed better than most predicted in 2014. The job market surged, consumer and business confidence improved and corporations aggressively put cash to work. Equities experienced double-digit returns, but also endured periods of setbacks, including the first 10% decline in three years. The biggest surprises for 2014 included a further drop in interest rates, a sharp decline in the price of oil and a significantly stronger U.S. dollar. Global economic growth experienced a notable divergence. Europe’s struggles could be tied to still-tentative central bank actions and the impact of Russian sanctions, while emerging economies were hit by falling commodity prices, slow global trade, and selective inflation, credit and liquidity pressures.

“We also believe last year saw several important transitions emerge: U.S. GDP growth from around 2% to the 3% range, core inflation from approximately 1% to 2%, the Federal Reserve becoming slightly less market-friendly and wage gains moving from flat to moderately positive. It also appears to us that we’re moving from an environment where equities and bonds did well to a period in which stocks are likely to advance while areas of the bond market struggle, and from a period of very low to more normal volatility. The phase of the rising tide lifting all boats appears to be ending and investing is becoming more challenging. As such, the importance of security selection will likely increase”, says Doll.

10 Predictions for 2015

1.  U.S. GDP grows 3% for the first time since 2005.

2. Core inflation remains contained, but wage growth begins to increase.

3. The Federal Reserve raises interest rates, as short-term rates rise more than long-term rates.

4. The European Central Bank institutes a large-scale quantitative easing program.

5. The U.S. contributes more to global GDP growth than China for the first time since 2006.

6. U.S. equities enjoy another good yet volatile year, as corporate earnings and the U.S. dollar rise.

7. The technology, health care and telecom sectors outperform utilities, energy and materials.

8. Oil prices fall further before ending the year higher than where they began.

9. U.S. equity mutual funds show their first significant inflows since 2004

10. The Republican and Democratic presidential nominations remain wide open.

2015 Outlook

In his view, 2015 is likely to be the year investors transition from disbelief to belief, or from skepticism to optimism.“Sir John Templeton coined the phrase, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria,” and we believe we are entering the “optimism” phase. This means 2015 should result in another decent year for U.S. equities as we experience (1) solid momentum in U.S. economic growth with low inflation, (2) a pickup in consumer spending, (3) solid earnings growth, (4) a boost from low commodity prices and financing costs and (5) a relatively solid liquidity environment aided by stimulus from non-U.S. central Banks”.

The United States is likely to experience a surprisingly resilient economy in the coming year, Doll says. The consumer sector should strengthen due to better jobs growth, some improvement in real wage gains and a noticeable pickup in confidence. Investment spending is likely to rise, while the government sector should move from a modest economic drag to a net contributor to growth. Halting recoveries in much of the rest of the world will dampen U.S. export growth but keep commodity and interest costs low. Deflation threats in Europe and Japan should start to ease, while China’s economic growth is likely to slow.

Although equities are no longer a bargain, they offer better value than other financial assets and should outperform cash, bonds, inflation and commodities, says Doll.“Core inflation should remain contained, but wage gains will likely increase. The benefits from the decline in oil prices should outweigh the negatives, although the swiftness of the price decline could cause dislocations and credit issues. Other risks include occasional deflation threats, unease associated with monetary tightening and unknown consequences of the significant decoupling in growth between the U.S. and the rest of the world. Even though equities are likely to advance further, the pace of gains that occurred during the massive run-up since the 2009 market low is likely to falter. We are expecting to see average annual returns somewhere in the mid-to-high single digit range. Within the equity market, we prefer mid-cycle cyclicals, companies that can generate positive free cash flow and those with higher levels of domestic earnings”.

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