The Markets January 7, 2015

Bob Doll Peers into the Tea Leaves for 2015

Investor skepticism gives way to optimism, the equities market will continue delivering (but brace for a rocky ride) and retirement plans will want to take a hard look at their fixed-income choices.
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For more than a quarter of  a century, Bob Doll, senior portfolio manager and chief equity strategist for Nuveen Asset Management, has been forecasting the economy with a careful consideration of the key factors—economic, global, political—that will have an impact on the financial markets. And every year, he scrupulously keeps track of his own performance in making these predictions.

Last year, Doll predicted active managers would outperform index funds—and a handful did—but the majority failed to outperform their benchmarks, the worst performance since 2003. One reason, Doll said, is that generally active managers outperform when interest rates rise, which he predicted would happen. The continuing low interest rate environment definitely functioned as a drag on active managers’ performance, Doll said.

Doll predicts again this year that interest rates will rise (No. 3: The Federal Reserve raises interest rates, as short-term rates rise more than long-term rates.) The likely scenario is a meeting and guidance issued in March, ahead of an actual rate raise in June, Doll said.

Doll’s prediction hinges on several factors, including the U.S. economy growing above trend; nominal growth approaching 5%; a strengthening job market with unemployment below 6%; and a likelihood of higher wage rate increases.

However, retirement plan sponsors and advisers will want to keep an eye on interest rates and manage the fixed-income in their portfolios if rates rise, Doll said.

If interest rates rise, obviously you’ll want less fixed income, Doll told PLANADVISER. “You want to be careful of your duration and your maturity; you want to be in fixed-income products that have lower Interest rate risk than a Treasury, so it takes you out various credit curves in other places,” he said. “Some investors will look to high-yielding equities,  where you can get a good total return on stocks if rates go up and last, equity market neutral funds tend to have bond-like returns, bond-like volatility but are absent interest rate risk.”

Improving Economy

The U.S. economy continues strong, Doll said, and his forecast calls for 3% growth in GDP for the first time since 2005. The first quarter of 2014 was in stark contrast from the rest of the year, and if 2015 resembles the last three quarters, this is an easy one to get right, Doll said. “The U.S. economy looks increasingly able to stand on its own two feet and no longer requires first aid from the Fed,” he said.

Except for exports, the key parts of the U.S. economy are improving. Jobs growth and an uptick in business and consumer sentiment have been especially impressive, Doll feels. Falling oil prices may have some negative economic consequences, but the upside to consumers and other users of oil will likely be a net benefit.

Core inflation will remain in check, but wage growth begins to increase. Aside from falling oil prices, Doll said he believes core inflation has been moving from around 1% to closer to 2%. He expects wage growth to begin rising in 2015 since unemployment has dropped to under 6%.

Doll’s other predictions are:

  • The European Central Bank institutes a large-scale quantitative easing program.
  • The U.S. contributes more to global GDP growth than China for the first time since 2006.
  • U.S. equities enjoy another good yet volatile year, as corporate earnings and the U.S. dollar rise.
  • The technology, health care and telecom sectors outperform utilities, energy and materials.
  • Oil prices fall further before ending the year higher than where they began.
  • U.S. equity mutual funds show their first significant inflows since 2004.
  • The Republican and Democratic presidential nominations remain wide open.

Doll’s predictions for 2015 can be downloaded here, including a full version that includes a scorecard of his predictions for 2014. (He scored 6.5 out 10, slightly below his average of 7 to 7.5 for the past 26 years that he has been forecasting the economy.) Financial advisers can subscribe to Doll’s weekly commentary and special market reports through this link.

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