By Harvey R Peck, CFA
On Thursday, February 11, 2016, CFA MN hosted a presentation by Bob Doll, Senior Portfolio Manager and Chief Equity Strategist at Nuveen Asset Management. After a light dinner at the Minneapolis Club, Mr. Doll shared his highly respected views and perspectives on the global equities markets. You may recognize Bob Doll as a regular on CNBC, Bloomberg TV and Fox Business News with Doll being quoted in other business publications.
Vicious negative feedback loop
Doll opined the equity markets are in a “terrible funk”, a vicious negative feedback loop. As global growth estimates decline, oil prices drop, earnings estimates are revised down, stock prices fall, there is forced selling, credit standards tighten, then global growth estimates decline, and the cycle repeats itself.
How do we extract ourselves from this funk? Oil needs to stop going down. The U.S. dollar needs to stop appreciating. Problem: Oil and commodities are in a multi-year bottoming process.
Can the U.S. economy avoid importing these global deflationary trends?
Doll noted the U.S. economy is doing better than most other developed economies. It is primarily a domestic consumer economy. Doll is forecasting U.S. real growth at mid 2% and nominal GDP growth at 3-4%.
The U.S. consumer economy is doing relatively well as supported by strong new housing starts, firm home resale prices and record auto sales.The Federal Reserve’s inflation targets are within reach. Rising U.S. domestic inflation expectations is supported by two factors: (1) a tightening labor market showing upward labor price pressures and (2) housing rents and home prices increasing.
Bull market in bonds over
The bottom in yields likely occurred back in July 2012. By 2016 year-end, Nuveen forecasts U.S. Treasury yields to be higher. Doll expects high yield credit spreads to be narrower and yields to be lower by year end. Nuveen contends high yield spreads are currently overreacting to the declining creditworthiness in energy and materials. However, these factors should not affect other non-industrial areas of the economy such as medical, information processing technology and media. Currently the high yield markets have corrected too much and the correction was too fast.
The U.S. federal deficit improvement trend is over. Rising entitlement costs over the coming years will cause the deficits to expand. The growing deficit is not yet problematic. Investors are encouraged to wait until the government’s ability to service debt is rising faster than GDP before implementing defensive strategies.
The U.S. needs bipartisan congressional action to address the problem of corporate income taxes on foreign based earnings. The current tax law is fostering large capital outflows from the U.S. economy. This is a very important issue for the long-term viability of the U.S. economy.
Nuveen recommends overweighting allocations to equities, underweighting bonds and fixed-income and holding an overweight in cash reserves. They expect above average volatility. Most investors will be frustrated by the current environment of higher volatility and low returns.
We thank Bob Doll and Nuveen Asset Management for sharing their thoughts and recommendations. You can follow Bob Doll’s commentaries and other Nuveen Asset Management research publications at www.nuveen.com/home. Thanks again to Nuveen Asset Management for their support of CFA MN.