- Bob Doll described 2015 as the year when investors transition from disbelief to belief, or from skepticism to optimism
- Nuveen believes we are entering the “optimism” phase.
- Most predictions made by Bob Doll at the beginning of the year are on track to be true
- While U.S. equities are no longer table-poundingly cheap, Doll beleives that they offer better value than other financial assets
At the beginning of this year Bob Doll, Senior Portfolio manager and Chief Equity Strategist at Nuveen Asset Management described 2015 as the year when 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.” Nuveen believes we are entering the “optimism” phase. As Doll points out, 2015 is on track to be another decent year for U.S. equities as we experience:
- Solid momentum in U.S. economic growth with low inflation,
- A pickup in consumer spending based on job growth, confidence and a positive wealth effect,
- Solid earnings growth,
- Stimulus from low commodity prices and financing costs and
- A still-good liquidity environment aided by stimulus from non-U.S. central banks.
Midway through the year, these statements largely hold true. These are the predictions Bob Doll made at the beginning of the year, and how they are faring:
- U.S. GDP grows 3% for the first time since 2005 (X) Although Bob Doll believes the U.S. will grow 3% for the rest of the year, the weak first quarter will make it difficult for the year as a whole to average 3%.
- Core inflation remains contained, but wage growth begins to increase (✔)U.S. inflation appears to be bottoming as it moves from very low to low levels
- The Federal Reserve raises interest rates, as short-term rates rise more than long- term rates (?) Both short- and long-term U.S. bond yields have started to rise in anticipation of Fed rate hikes,1 which Nuveen expects will begin in September.
- The European Central Bank institutes a large-scale quantitative easing program (✔) This happened in January, and the effects are being felt in Europe, where growth is improving to some degree.
- The U.S. contributes more to global GDP growth than China for the first time since 2006 (✔)As a result of U.S. growth improving and China’s growth slowing, this one is heading in the right direction.
- U.S. equities enjoy another good yet volatile year, as corporate earnings and the U.S. dollar rise (?) This is the seventh year of the bull market in the United States. The S&P 500 Index has never risen for seven consecutive calendar years,yet Doll highlights this is a distinct possibility in 2015, even if only by a modest amount.
- The technology, health care and telecom sectors outperform utilities, energy and materials (✔) If we were scoring these predictions in degree of correctness, this would be at the top of the list. As of last week’s market close, these favored sectors in the U.S. are up an average of 6.6% for the year while the other three are down 3.7%.
- Oil prices fall further before ending the year higher than where they began (?) Oil fell earlier in the year before experiencing a recovery. If the year ended today, this one would be proven correct
- U.S. equity mutual funds show their first significant inflows since 2004 (x) Equity mutual fund flows have actually been negative so far this year as investors have been moving out of U.S. stocks.Nuveen expects investor confidence will pick up and that flows will increase, but they acknowledge they will likely be on the wrong side of this prediction
- The Republican and Democratic presidential nominations remain wide open (?)The list of Republican candidates is longer than virtually anyone predicted. While Hillary Clinton remains the Democratic front runner, her candidacy is not without its difficulties.
While U.S. equities are no longer table-poundingly cheap, Doll beleives that they offer better value than other financial assets and should outperform cash, bonds, inflation and commodities. Even though equities are likely to advance further, the pace of gains is likely to be slower than what investors experienced during the first six years of this bull market. Nuveen believes U.S. equities are likely to produce average annual returns somewhere in the mid-to-high single digit range. Within the U.S. equity market, they prefer mid-cycle cyclicals, companies that can generate positive free cash flow and those with higher levels of domestic earnings.
All market prices are as on 6/26/15 according to Morningstar Direct, Bloomberg and FactSet