Gurus: Bull market alive and well

Coté, Doll love equities but hate Washington politics, health care law

Oct 13, 2013 @ 12:01 am

By Jeff Benjamin

Despite turmoil in Washington and skepticism over the Affordable Care Act, two industry heavyweights remain bullish about equities and the economy.

“Forecasting the market is pretty basic — just watch the correlation to corporate-earnings growth and the S&P 500,” Douglas Coté, the chief investment strategist at ING U.S. Investment Management, told an audience of more than 500 last week at the Investment Management Consultants Association's Advanced Wealth Management Conference in Chicago. “When earnings grow, stocks go up, and when earnings slow, stocks go down.”

With that in mind, and in the context of what he described as “the Washington mess,” Mr. Coté said that the “safest trade right now is to get back to a full allocation to equities.”

Stair-stepping mode

Both Mr. Coté and Robert Doll, chief equity strategist and senior portfolio manager at Nuveen Asset Management LLC, concurred that “the U.S. equity bull market is alive and doing reasonably well,” as Mr. Doll put it.

“Strong economies and strong stock markets don't coexist very often,” he said.

“So may this mediocre growth last forever. It won't, but let's enjoy it while it lasts,” Mr. Doll said.

But even though he is bullish on U.S. stocks, he warned that markets are always in a stair-stepping mode that involves periods of growth followed by periods of consolidation.

“Right now, we're in a consolidation phase,”Mr. Doll said. “For several reasons, [gross domestic product] over the next 12 months is likely to be slightly higher than it is today.”

Among the forces pushing that higher economic growth are spiking consumer confidence, stabilization in China and “less bad news out of Europe,” Mr. Doll said.

But even in the context of his case for a market consolidation, he recommended an increased allocation to stocks. Part of Mr. Doll's point was made by a study showing that 64% of Americans are either deeply mistrustful or skeptical of stocks.

“Bull markets don't end until everyone can't wait to get in, and this survey does not show that,” he said.

One way of illustrating Mr. Doll's passion for stocks is by highlighting his distaste for bonds.

“When it comes to bonds, my view would be to look at whatever a client's normal allocation is and move it at least 10 points higher in equities and 10 points lower in bonds,” he said. “If you can get away with it, make that 20 points, because as rates go up, there is a head wind to virtually all bonds.”

While both panelists are clearly bullish on stocks, neither is particularly fond of dividend-paying stocks right now.

“Equities are for growth, period,” Mr. Coté said. “If I want income, that's what bonds are for.”

Mr. Doll said, “This love affair with dividend-paying stocks is simply a function of the fact that they have done well, and that's because they have bondlike characteristics.”

'Nominal growth'

As far as near-term risks go, however, the concerns are big and bigger.

“My concern is whether there is enough nominal growth out there,” Mr. Doll said. “We all earn paychecks out of nominal growth, and we pay bills out of nominal growth, and corporate earnings come from nominal growth.”

Mr. Coté took a slightly more ominous tone by suggesting that the biggest risk is the one you can't see.

“I'm concerned about the next black-swan event that I don't see and can't see,” he said. “I believe the Fed's no-taper decision last month was a nod to growing currency problems in Southeast Asia and that it didn't have anything to do with U.S. unemployment levels.”

On the issue of the health care reform law, both men responded in virtual lock step, acknowledging a need to temper their public comments.

“There are two general beneficiaries of Obamacare: the uninsured and most portions of the health care sector. But I think it's a head wind to economic growth,” Mr. Doll said.

Mr. Coté summed up his feelings this way: “If you like how the post office delivers your mail, you're going to love the way the government delivers your health care.”


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