It’s that time of year. If you’re feeling blue in the post-holiday letdown, Nuveen Asset Management’s top talking head Bob Doll is here to cheer you up (or not, depending on one’s point of view). He’s released his 10 predictions for 2017 with stocks, bonds, politics, unemployment and so much more.
Before getting to this year’s list, however, how did Doll, senior portfolio manager and chief equity strategist, do with last year’s picks?
He got only one wrong, but it’s unsettling nonetheless, since it was investment sector-specific and therefore most pertinent to his job. Behold his 2016 predictions:
- Real GDP remains below 3 percent and nominal GDP below 5 percent for an unprecedented tenth year in a row. Correct
- Treasury rates rise for a second year, but high yield spreads fall. Correct
- S&P 500 earnings make limited headway as consumer spending advances are partially offset by oil, the dollar and wage rates. Correct
- For the first time in almost 40 years, U.S. equities experience a single-digit percentage change for the second year in a row. Correct
- Stocks outperform bonds for the fifth consecutive year. Correct
- Non-U.S. equities outperform domestic equities, while non-U.S. fixed income outperforms domestic fixed income. Half Correct
- Information technology, financials and telecommunication services outperform energy, materials and utilities. Wrong (To be fair, excluding dividends, the former did in fact outperform on a price-only basis)
- Geopolitics, terrorism and cyber attacks continue to haunt investors but have little market impact. Correct
- The federal budget deficit rises in dollars and as a percentage of GDP for the first time in seven years. Correct
- Republicans retain the House and the Senate and capture the White House. Correct
As for this year’s predictions, here’s what he’s got (we’re particularly intrigued by No. 8):
1) U.S. and global economic growth improves modestly as the dollar strengthens and reaches parity with the euro.
“We forecast another relatively modest year of growth in 2017, somewhere around 2 percent real GDP growth. We also expect the dollar to exhibit further strength and reach parity with the euro sometime in 2017.”
2) Unemployment drops to its lowest level in 17 years as wages increase at the fastest pace since the Great Recession.
“The current 4.6 percent unemployment rate could drop further next year to below the 4.4 percent rate reached in May 2007. Average hourly earnings growth bottomed at below 2 percent two years ago and could exceed the 3.1 percent level they hit in June 2009. We are also watching to see if the participation rate experiences a cyclical pickup.”
3) Treasury yields move higher for a third consecutive year for the first time in 36 years as the Fed raises rates at least twice.
“We have clearly reached an inflection point with the Fed and with interest rates more generally …as 2016 drew to a close, the Fed pointed to multiple rate increases in 2017 and 2018.”
4) Stocks hit their 2017 highs in the first half of the year as earnings rise but price/earnings multiples fall.
“…we think a tug of war between rising earnings expectations and eventual valuation (P/E multiple) deterioration will suppress equity prices. As a result, we may witness the 2017 high in stock prices in the first half of this year.”
5) Stocks outperform bonds for the sixth year in a row for the first time in 20 years while volatility rises.
“It hasn’t happened in two decades, but we think stocks will beat bonds for six years in a row …If real and nominal growth increase, it will likely be a difficult environment for fixed income. But it could also be favorable for equities. We also expect volatility in both asset classes to rise.”
6) Small caps, cyclical sectors and value styles beat large caps, defensive and growth areas.
“After a period of noticeable underperformance, small cap stocks have begun to beat large cap stocks due to the rise in the dollar, expected tax changes and weakening global trade. Cyclicals should beat defensives as growth accelerates and income oriented stocks continue to underperform. Valuation for cyclicals is supportive as well. Finally, value over growth (which is positively correlated to cyclicals over defensives) should occur as growth accelerates and inflation rises.”
7) The financials, health care and information technology sectors outperform energy, utilities and materials.
“Financials have been the leader since the election and should benefit from regulatory easing in 2017. Financials also feature cheap valuations. Health care presents a good opportunity beyond headline risks, and information technology offers both good growth and value characteristics. Conversely, we continue to believe global growth will not provide the pricing power necessary for energy and materials to shine. Finally, utilities represent the intersection of yield, perceived safety and low volatility — a combination that has underperformed recently and may continue to do so.”
8) Active managers’ performance improves as flows into equities rise.
“The period of extended significant inflows into bond funds and outflows out of equity funds may be ending. Improvements in nominal growth argue for a reversal and relative valuations also look supportive. Investors have experienced an unusual confluence of events — slow growth, deflation, macro-dominated markets, falling interest rates and high correlations within and across asset classes — that are likely fading, if not reversing. Active equity managers have struggled in recent years, but perhaps the stars are finally aligning for a long-awaited reversal in this trend.”
9) Nationalist and protectionist trends rise as pro-domestic policies are pursued globally.
“…In general, we believe more globalization and more trade are healthy for global GDP growth, so moves in the opposite direction are worrisome. This issue won’t be decided in one calendar year, but should be monitored carefully.”
10) Initial optimism about the Trump agenda fades in light of slow legislative progress.
“While we believe fundamental change is on the way, it may not be as easy as it appears. In particular, such comprehensive legislation is rarely simply crafted and passed without significant revision. Secondly, most of the contemplated agenda is likely to be passed in 2017, but won’t take effect until 2018. Additionally, the mood of the markets may sour if Donald Trump’s protectionist rhetoric (largely absent from postelection proceedings) resurfaces.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
