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Bob's best bets: Nuveen equity chief Doll's top 10 tips for 2018

Nuveen’s chief equity strategist Bob Doll gives his 10 top predictions for 2017.

1. GDP to hit decade highs

Doll predicted US real GDP will reach 3% and nominal GDP 5% for the first time in over a decade. He believes that the combination of dissipating negative impacts from the financial crisis, a significant corporate tax cut and a rising capacity utilization rate, should lead to a return to somewhat more normal growth and additional economic expansion.

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2. Protectionism won’t stop global growth

‘The world has never been in better shape, (there is) a single digit number of countries in recession and that is likely to remain low for sometime,’ said Doll in a webcast Thursday morning. ‘We don’t think this (trade protectionism) is going to derail growth but it could hold growth back, we need to keep our eyes carefully on this issue.’

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3. Unemployment falls to 50-year low

Doll expects unemployment to drop below 4% and wage growth to pick up as a shortage of workers, robust corporate profits and generally strong corporate conditions manifest themselves. He said unemployment would hit the lowest level in nearly 50 years with wage growth at its highest since the Great Recession.

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4. The yield curve flattens (but does not invert)

Doll views a rise in inflation as probably the biggest threat to the financial markets in 2018. He expects interest rates to increase more significantly and a flattening yield curve, but not an inversion.

‘We achieved peak quantitative easing in March of last year and that is going to rapidly fall as central banks stop purchasing and in some cases like the US start selling some of their securities,’ said Doll. ‘This has certainly been a prop to keep interest rates low.’

He added that the narrowing yield curve is not a warning sign for US equities but rather stocks tend to do well as a yield curve flattens. The yield on the 10-year Treasury would reach 3% for the first time since 2014, he said.

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5. Bull market runs on but correcton on way 

‘This bull market will become the longest in history in August of this year and the second largest ever if we surpass 2863 on the S&P, not only have we not had a 5% pullback, we have not even had a 3% one for almost 12 months,’ said Doll.

‘That’s unusual, abnormal and unlikely to continue. We need to condition investors to recognize that the good news is stocks have the highest long-term return of any asset class but there is a price to pay for that extra return and that is you are on a roller coaster ride and we have not seen much of the downside of that roller coaster, we will see it at some point in time.'

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6. US equity returns lag earnings growth

Doll said that unlike the tech bubble and the 2008 financial crash, where only half of stocks were up, this time about three quarters of the stocks are up, which is what he believes to be the sign of a very healthy bull market. He added that earnings expectations for 2018 are justifiably high and he expects earnings to outpace stock market returns in 2018.

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7. Equities beat bonds… again

Doll said that in a rising rate environment, stocks will continue to outperform bonds. He added that equities may be vulnerable to pullbacks in response to rising bond yields, but a major decline in stock prices looks unlikely as long as growth and earnings are improving. If equities outperform bonds, it will be the seventh consecutive year in which they have done so, something that has not happened for 100 years.

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8. Cap ex trumps buybacks

Doll said that the combination of chronic underinvestment in cap ex cycle, strong profitability, the low cost of capital, improved economic confidence, lowered corporate tax rates, the repatriation of foreign earnings and the expensing of capex in the new tax bill would increase business fixed investment by maybe 6% or more in 2018, at the expense of share of buybacks.

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9. Telecommunication, tech and health care on the up

Doll tipped telecoms, tech and health care to outperform utilities, energy and materials.

‘From a common factor standpoint, we have a preference for value, cyclical over growth and a moderate preference for big over small,’ he said. 

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10. Republicans lose the House, retain the Senate and distance themselves from Trump

'The long list of Democrats up for reelection in states where President Trump won by a wide margin provides some hope for the Republicans that they will retain the Senate, but the poor polling of the president and the Republican Congress means the Democrats may well retake the House,' he said. 'Whatever the outcomes, we expect many congressional Republicans will further distance themselves from the president. For markets, it probably means little, if any, significant legislation after the tax bill.'

 

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