How’s He Doing? A Review of Bob Doll’s Forecast

The good, the bad and the uncertain are the ratings for economic forecasts by Robert Doll, chief equity strategist at Nuveen Asset Management. 

The results are in, at least for a review of the first quarter, and  Doll, also senior portfolio manager at Nuveen, gets four solid checkmarks, two wrong-answer buzzers, and four areas in which it’s too early to tell how his trend forecast for 2013 is playing out. (See “Nuveen’s Bob Doll Forecasts Trends for 2013.”)  

Doll’s first prediction was that the U.S. economy would continue muddling through, with nominal growth below 5% for the seventh year in a row, and so far this is on track.  “The top/start economy and the headwinds from policy uncertainties continue to dampen economic growth,” Doll said. Real gross domestic product and inflation (CPI) are expected to increase by 1.9%, he said. “If this occurs, nominal growth—Real GDP and CPI—will end below 5% for the year.” 

U.S. stocks would record a new all-time high as stocks advance for the fifth year in a row, Doll prophesied, and on March 28, he pointed out, both the Dow Jones Industrial Average and the S&P 500 hit an all-time high. The Dow Jones also continued rising in early April. “Stocks  have performed well in large part because of injections of central bank liquidity, declining tail risks and a slowly improving economy,” Doll said.  

Doll foresaw dividends increasing at a double-digit rate as payout ratios rose, and this seems to be shaking out. According to Doll’s performance review, dividends are up 17.4% year-over-year in the first quarter. The dividend payout ratio, defined as dividends/net income, has increased, to 32.8% as of March 31, from 27.9% in the same period a year earlier. “Many variables continue to support our view,” Doll said, pointing to caution by companies to reinvest in the business, high cash balances, strong free cash flow profiles and low payout ratios. 

A nascent U.S. manufacturing renaissance would continue, powered by cheap natural gas, Doll predicted, and this trend seems on track. “Many have jumped on this bandwagon since we said this in January,” Doll said.” The latest manufacturing figures for the U.S. from the Institute for Supply Management (ISM) indicate economic activity is strengthening. This is increasingly [a story that people believe] and while three months doesn’t equate to success, things are moving in the right direction.” 

Too Early to Tell 

It is too early to rate some of Doll’s predictions.  

Europe would begin to exit recession by the end of the year as the European Central Bank (ECB) eased and financial stresses lessened, was one prediction. In the first quarter, the ECB did not provide monetary easing, but Doll still expects that it will. “Financial stresses are largely on the back burner,” he noted. “Europe remains in a recession, but we still believe this will slowly change by the end of the year.” 

Time will also tell if Doll’s prediction that the U.S. yield curve would steepen as financial risks recede and deflationary threats lessen will come true. At this point, he said, the yield curve is steepening “because uncertainty is declining and the world is slowly healing.” At the end of the last quarter of 2012, he pointed out, the yield difference between the 90-day Treasury bill (0.06%) and the 10-year U.S. Treasury bond (1.76%) was 1.7%. That gap widened to 1.79%, when the T-bond yield rose to 1.85% on March 31. 

Doll predicted that U.S. multinationals would outperform domestically focused companies after two years of underperformance, and it is too early to tell how this will play out. “Most earnings surprises on the upside for the fourth quarter (reported in the first quarter) were from multinationals rather than domestic companies, according to BCA Research,” Doll said. “Although more time is needed to evaluate, we believe that it is likely that companies with earnings exposure outside the U.S. will benefit in the latter part of the year.”  

About that Budget … 

Also too early to tell: whether the government will pass a $2 trillion to $3 trillion 10-year budget deal, but Doll is hopeful. 

“We think this can still happen, but the process will be very bumpy,” he said. “The American Taxpayer Relief Act of 2012 will reduce the deficit by $650 billion over 10 years. Although this is only tax increases, we expect Republicans to agree to additional revenue enhancement and Democrats to more spending cuts, including some in entitlements. The fiscal year 2014 budget outlines an additional $1.8 trillion in deficit reduction.” 

Now for the clunkers. “We are zero for two in the first quarter,” Doll admitted, but that is a pretty good average. He predicted that emerging market equities would outperform developed market equities, but the MSCI Emerging Markets Index returned -1.57% over the first quarter, compared with returns of 7.87% for developed markets (MSCI World Index). “We continue to think the emerging markets will perform better as those economies improve,” Doll said. “But uncertainty around the world has kept the attention on the developed markets, notably the U.S. and Japan.” So this could still turn around before the year is up.  

Doll forecast large-cap stocks to outperform small-caps, and cyclical companies to outperform defensive companies. Using the Russell indices, large-cap stocks returned just 10.96% versus the 12.39% of small-cap stocks, but Doll said they still believe that the slow growth will accrue to the benefit of large-cap stocks, and that cyclicals can improve as the black hole risks lessen. Again, time will tell.  

Weekly investment commentary by Doll, and a link to the predictions and scorecard, is here.