The Old Equity Bull Market Charges Into 2018

Continuing an annual tradition, Bob Doll, senior portfolio manager and chief equity strategist at Nuveen Asset Management, revealed his 10 macroeconomic predictions for the year ahead.

Right off the bat, Doll highlighted that seven in 10 of his predictions last year turned out to be at least mostly true, putting his wholly unscientific historical average at 7.2 correct out of 10. He also noted that the predictions are given strictly from the perspective of a “top-down large cap portfolio manager.”

“Performance on equities has been much better in the last 12 months than was expected,” Doll said. “One can only characterize the equity market returns for 2017 as excellent, and bond returns, while more meager, were still better than expected. In 2017 I expected interest rates to trickle higher, but this didn’t really happen, and so some unexpected coupons were earned in the bond markets. It made for, perhaps, the first perfect year in the markets that we’ve ever had.”

As Doll pointed out, the U.S. and global equity markets generated a positive return each and every month in 2017. To be clear, this was the only time in the history of the markets that this has ever happened.

“A bad day in 2017 was a flat day,” Doll said. “Turning to 2018 we can be quite optimistic once again, but even so, we have to keep in mind that 2016 and 2017 were not normal. One might also wonder, how can stocks go up again when Washington, D.C., is such a political mess? In fact, they have little to do with one another, at least when it comes to short-term performance or even performance over a year or single cycle.”

Doll’s 2018 predictions

Doll’s first prediction for 2018 is that U.S. real GDP growth will reach 3% and nominal GDP will reach 5% for the first time in over a decade: “The negative impacts from the financial crisis have finally moderated. This backdrop, combined with a significant corporate tax cut and a rising capacity utilization rate, should lead to a return to somewhat more normal growth.”

The second prediction is that global expansion continues with the fewest countries in recession in history. One interesting caveat here is that, typically in an expansion, imports and exports are among the fastest growing segments of the global economy. But, Doll said, anti-trade sentiment in the United States and elsewhere has held this back.

Third, Doll predicted unemployment will fall to the lowest level in nearly 50 years—below 4%—as wage growth is the highest since the Great Recession. Fourth, Doll projected the yield curve will flatten but not invert, as the 10-year Treasury yield reaches 3% for the first time since 2014.

“There are several reasons why rates are likely to increase in 2018, including a pickup in inflation,” Doll said. “In fact, we view a rise in inflation as probably the biggest threat to the financial markets in 2018. It is important to note that we expect a flattening yield curve, with the Fed raising rates faster than the curve moves up in yield, but a flattening curve is not a good predictor of equity prices. Equities tend to sag only after a period of time when the yield curve inverts, which we do not expect in 2018.”

Doll’s fifth prediction is that stocks will continue growing and during 2018 will surpass the previous longest bull market in history. Tied to this, Doll said that eventually the market could likely face at least a 5% correction after the longest period without one. “While we expect the bull market to continue and become the longest in history, we also expect the uninterrupted strings of advances to fade and occasional pullbacks as interest rates and inflation rise,” Doll said. “A solid earnings outlook, still-benign inflation and interest rate environments, along with the absence of sentiment or technical warning signs, underlie our generally sanguine outlook.”

Sixth, Doll said U.S. equity returns will lag earnings growth for the first time in six years, making the longest streak in decades. “U.S. stock returns have outpaced earnings in each of the last six years, the longest streak on record,” he said. “The last time equity appreciation exceeded earnings growth for a sustained period of time was 1995 to 1999. We expect the current streak to end in 2018, meaning earnings will outpace stock market returns.”

Seventh, Doll argued that equities will beat bonds for the seventh consecutive year—for the first time in nearly a century. Eighth, Doll suggested corporate capital expenditures will increase at the expense of share buybacks. Ninth, he posited that telecommunication services, information technology and health care will outperform utilities, energy and materials.

Finally, Doll said he expects Republicans to lose the House, but retain the Senate, “and further distance themselves from President Trump.”