This year will be a year of transition for the global economy and global markets, moving from concerns about "relentless stagnation in economic growth" to rising confidence among consumers and businesses, says Bob Doll, chief equity strategist at Nuveen.
It's not "necessarily animal spirits," but "we have turned the corner," Doll explained at his annual New York City event announcing his top 10 predictions for the year.
Indeed, the S&P 500 index ended 2016 with a 9.5% gain while the Dow Jones industrial average finished the year 13.4% higher. Doll had predicted a high single-digit gain in the S&P 500 this time last year – one of 8.5 correct predictions he says he made then (he missed when his most favored stock sectors underperformed his least favorite and when non-U.S. stocks did not outperform U.S. stocks).
(Related: Bob Doll's 10 Predictions for 2016.)
Unlike most market strategists, however, Doll correctly predicted that Republicans would sweep the White House and Congress during the November election.
In his 10 Predictions for 2017, Doll says he feels like he's going further out on a limb than normal because the global economy is shifting toward stronger growth, higher inflation and rising interest rates at a time of increasing uncertainty including possible significant changes in U.S. tax, trade, immigration and regulatory policies under the Donald Trump presidency.
"The 35-year disinflationary, falling interest rate world is ending, and that brings some challenges," writes Doll. Among them, are a stronger dollar, which, along with rising rates, may offset the positives of an improving economy and tax reform that could help boost corporate earnings. "In their environment, investors may be in for a difficult ride," writes Doll.
Here are his top 10 predictions for 2017:
1. U.S. and global economic growth improve modestly as the dollar strengthens and reaches parity with the euro.
Doll forecasts "mediocre" U.S. growth of around 2%, adjusted for inflation.
On the positive side is the U.S. election has "unleashed a significant increase in consumer and business confidence," writes Doll. But potentially offsetting that optimism are the aging business cycle, rising interest rates, stronger dollar and continued low productivity growth.
The U.S. dollar is currently worth 1.05 euros.
2. The U.S. unemployment rate falls below 4.4% to its lowest level in 17 years as wages rise at the fastest pace since the Great Recession.
Doll predicts that average job growth will top 150,000 in 2017. In 2016, it averaged 185,000. He also predicts that average hourly earnings growth could exceed the 3.1% level it hit in June 2009, and he's watching to see if the participation rate, which has been sluggish, rises as well.
3. Treasury yields move higher for the third consecutive year, which would be a first in 36 years, as the Fed raises rates.
The Federal Reserve has indicated it will raise rates three times in 2017, but Doll says that will depend on the strength of the economy and increase in inflation. He says just two Fed rate hikes are possible, and he's forecasting the federal funds rate at 1.25% by the end of 2017 and 2% by the end of 2018.
Doll predicts the yield on the 10-year Treasury will end the year at 3% this year and 3.5% next year.
Among bonds, Doll favors munis, corporates and sovereigns, in that order, but all are expected to underperform stocks.
4. Stocks reach their 2017 highs in the first half of the year as earnings rise but price/earnings multiples fall.
Doll predicts the S&P 500 will end 2017 at 2,350, about 4% above its current level.
The stock market will be supported by a stronger economy and rising earnings, but rising inflation and rising rates will pressure price/earnings multiples. Support from tax reform and regulatory reform, which could result in repatriation of foreign earnings, could be delayed, says Doll.
