Slow and steady for economy, stocks and tapering: Nuveen's Doll

Strategist doesn't see big head winds; forecasts mid- to high-single-digit equity gains this year

Jan 2, 2014 @ 9:42 am

By Robert C. Doll

stocks, equities, tapering, federal reserve, fixed income, emerging markets, bonds, economy, growth, earnings, price-earnings ratio
+ Zoom

Economic growth was slow but stable during a year in which a federal government shutdown lasted for 16 days and Detroit filed for bankruptcy. The unemployment rate fell to the lowest in five years, to approximately 7% from 7.9% to approximately, as a result of modest job growth and declining labor participation (a 35-year low).

A significant economic head wind was fiscal tightening through a substantial tax increase and spending restraint (sequestration). This may have cost the economy nearly 1.5% in growth. An encouraging bipartisan deal helped fund the government through spending reductions.

Monetary policy supported global growth. In late spring, the Federal Reserve announced it was contemplated tapering its fixed-income purchases, causing a 100-basis point rise in interest rates and creating turmoil in India and Brazil. Although global growth was softer than expected, equity markets performed well. Emerging markets experienced weakness in growth, commodity prices, credit and liquidity. Europe began to emerge from recession with reduced tail risks, Japan benefited from monetary and fiscal policy stimulus, and China engineered a successful soft landing despite remaining imbalances.

(See: Bob Doll's 10 predictions for 2014)

Our 2013 theme of a muddle-through economy and grind-higher equity market was influenced by equity valuation (P/E) expansion, perhaps because of reduced uncertainty and rising confidence. We see these factors continuing in 2014.

2014 OUTLOOK

We expect economic growth will be broader and stronger, yet remain moderate for the United States and around the world. Macroeconomic risks are diminishing as economies improve, which may help reduce fear and strengthen confidence. U.S. fiscal drag is lessening, Europe is emerging from recession, Japan's deflationary head winds are diminishing, and China is showing signs of stabilization. Improving sentiment for U.S. corporations, along with strengthening consumption, should lead to an increase in capital spending and a relatively stronger growth trajectory.

This transition to self-sustaining growth should provide the necessary acceleration in revenue and earnings growth.

Fed tapering likely will be slow and incremental, with U.S. and global monetary policy geared toward stimulating growth. As a result, we anticipate the bond market will continue to experience a gradual climb in interest rates. We believe rising bond yields are not a head wind for equities as long as economic conditions continue to improve.

Skepticism about the durability of the equity rally exists as many argue that stocks have become expensive and profit margins are unsustainably high. We do not think these potential head winds will prevent gains, but instead limit them, and perhaps cause volatility. Inflation is unlikely to be a problem, and deflation is a threat in Europe. Equities are vulnerable to a correction given recent strength and some technical deterioration, but we continue to favor a moderate pro-growth equity posture.

The U.S. equity market should continue to grind higher as a result of central bank liquidity, modest economic acceleration, quiet inflation and an improving fiscal situation. Expect the U.S. and global economies to improve in 2014, encouraging acceptable growth in revenue and earnings. The gradual improvement is not likely to threaten the unprecedented global monetary experiment that has helped underpin the rise in equity valuations. Even though equities may still advance, run-ups since 2009 and throughout 2013 have reduced our forward view for annual returns to mid- to high-single digits. We prefer companies with positive free cash flow profiles, low valuations, economic sensitivity and/or above average secular growth.

Robert C. Doll is chief equity strategist and senior portfolio manager at Nuveen Asset Management.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Events

How politics are moving markets

The financial services industry stands at the unique intersection of politics and market fluctuation. Clients are anxious and the right adviser can steady he waters. Scott Kubie of Carson Group explains how.

Video Spotlight

The Search for Income

Sponsored by PGIM Investments

Recommended Video

Path to growth

Latest news & opinion

T. Rowe Price steps up its game to serve financial advisers

The Baltimore-based mutual fund giant is more aggressively targeting financial advisers with a beefed-up wholesale crew and placement on custodial platforms.

The most important tax changes for 2018

The Internal Revenue Service issued inflation adjustments to more than 50 tax provisions for 2018.

Shift to Roth 401(k)s 'highly likely' part of tax reform: former Treasury official Mark Iwry

Mandated contributions to Roth accounts would likely only be partial, as opposed to having a full repeal of pre-tax accounts.

E*Trade acquiring custodian Trust Company of America

Discount broker buying second-tier custodian for $275 million.

Another thousand Dow points higher, and investors yawn

Market milestones keep falling like dominoes, with 51 records broken so far this year.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print