NEW YORK—“The U.S. and global economy is improving slowly and unevenly,” Bob Doll, chief equity strategist at Nuveen Investments, said at PLANADVISER’s 2013 Top 100 Retirement Plan Advisers seminar here Wednesday. “Equity markets have had double-digit increases for four years—and we are planning for a fifth year,” Doll said in his keynote presentation, “Building Retirement Portfolios: Real World Considerations for Advisers Now.”
“Current conditions are pretty ideal: low inflation, continued liquidity from the Fed, and below-trend growth. This is the sweet spot,” Doll said.
“U.S. consumers are doing OK —not
great, but good enough. They’ve seen 3.3% real-wage growth in the past 12
months, the strongest it’s been since the Great Recession. Stocks are at an
all-time high, fixed income is enjoying strong returns, and housing prices are
rising. This is causing consumers to continue to spend in the face of a $170
billion tax increase at the beginning of the year, and a 50-cent [per gallon]
increase in gas prices.”
Perhaps more crucially, Doll noted, “The consumer balance sheet has massively improved, due to paying down debt, writing off debt and a decline in interest rates. Yes, employment growth could be better and more people could be staying in the workforce [instead of giving up on searching for a job]. Corporations are experiencing very good growth, as measured by free cash flow and debt-to-equity ratios. In fact, corporations are healthier than any time since the 1950s.”
The big and lingering question, Doll said, is: Will corporations spend their cash? “They are likely to spend more in 2013 than in 2012—on workers, capital, dividends, buying back shares, and mergers and acquisitions,” he said.
“But risks remain,” Doll cautioned, most notably political stalemate in Washington to manage the $16 trillion government deficit and the annual 10% increase in the cost of the Social Security, Medicare and Medicaid entitlement programs. At the end of the day, the government will continue to issue debt to cover these costs, Doll predicted. While this will keep the U.S. from falling over the fiscal cliff, “debt deleveraging is also a risk factor and will be a headwind to growth.”
Still, Doll is forecasting U.S. GDP growth of 6% in 2013, up from 2% in 2012, and he counseled advisers to encourage plan participants to increase their equity exposure. This won’t be an easy task, however, Doll said: “People are as bearish on stocks as they have ever been. We are living on the edge of our seats because of the memory of the bursting of the biggest bubble we have ever seen, and that makes people nervous.”
Nonetheless, Doll maintained, advisers need to drive home the point with their clients that “the world is slowly healing.” Thus, he said, “In the equity market, I want to be overweight in areas that will grow over the next three to five years, namely emerging markets and the U.S. I prefer cyclical stocks to defensives: industrials, energy, materials and technology.
“We believe positive signs have emerged,” Doll concluded. “As a result, investors may be ready to put cash to work and move into higher-risk areas. And should the U.S. become energy independent through natural gas, that would be a huge plus.”