Equity markets experienced a strong first half of the year and stock prices already advanced to where we originally thought they would be at year-end. Bond prices rose as yields fell, with the Federal Reserve continuing its monthly tapering of asset purchases. Economic growth was disappointing early in the year, but earnings growth remained reasonably solid. Outside the U.S., the pace of growth and the direction of financial markets remained mixed. Meanwhile, financial market volatility has remained extremely low.
So with this backdrop, following is a look at the 10 predictions we made in January:
1. The U.S. economy grows 3% as housing starts surpass one million and private employment hits an all-time high: Too Early to Call
The housing market is improving and we think we're on track to surpass one million housing starts. Private employment already hit an all-time high in May. Following such a weak first quarter, achieving 3% growth for the year will be tougher but we do expect second quarter growth to approach 4% and the second half of the year to be relatively strong as well.
2. 10-Year Treasury yields move toward 3.5% as the Federal Reserve completes tapering and holds short-term rates near zero: Too Early to Call
The Fed is on track to complete tapering in the fourth quarter and we expect it will hold short-term rates near zero. The yield on the 10-year Treasury is lower today than at the beginning of the year, although we think yields will climb over the coming months.
3. U.S. equities record another good year despite enduring a 10% correction: A Good Start
Equities are certainly off to a good year, advancing 7.2% to date. So far, we have seen two corrections of over 5% this year (in January and in April) but have not experienced a 10% one.
4. Cyclical stocks outperform defensive stocks: Heading in the Wrong Direction
Cyclicals outperformed during the second quarter but not by enough to counter the lead defensive stocks gained in the first quarter. As the economy improves, our guess is that cyclicals will outperform defensive stocks.
5. Dividends, stock buybacks, capex and M&A increase at a double-digit rate: A Good Start
M&A has been the story of the year, with global activity up close to 40%. Dividend increases and share buybacks have been noticeable as well. Capital expenditures have yet to take off but leading indicators are pointing in the right direction.
6. The U.S. dollar appreciates as U.S. energy and manufacturing trends continue to improve: A Good Start
The dollar is slightly higher through midyear. Energy production and manufacturing trends are up by any number of measures.
7. Gold falls for the second year and commodity prices languish: Heading in the Wrong Direction
Commodities prices as a whole are higher for the year and although gold was essentially flat for the second quarter, prices are still higher year-to-date thanks to the gold price spike during the height of the Ukraine crisis. We still think prices will fall over the coming months.
8. Municipal bonds, led by high yield, outperform taxable bond counterparts: A Good Start
Municipal bonds (and high-yield munis in particular) have been stellar performers so far this year and have been easily outpacing taxable bonds.
9. Active managers outperform index funds: Too Early to Call
In large-cap U.S. equities, the trend of active managers outperforming started to emerge in July of last year. So far this year, results have been uneven but the most recent data shows improvements in relative performance for active managers, so the fate of this prediction remains to be seen.
10. Republicans increase their lead in the House but fall short of capturing the Senate: Too Early to Call
It looks likely that Republicans will make gains in both houses. The Senate is clearly in play, so we won't know until November if this one comes true.
Robert C. Doll is chief equity strategist and senior portfolio manager at Nuveen Asset Management. This post first appeared on his blog.