Bob Doll, chief equity strategist at Nuveen Asset Management, says 2018 will be a good year for the stock market but not a great one like the year that just ended, which was "perfect" from an investment perspective.
The economy grew, unemployment fell to a 20-year low, global growth expanded, inflation was tame and the S&P 500 gained almost 20%, ending higher every month, for the first time ever, says Doll.
"Stocks basically went up almost all the time … Earnings growth powered stocks higher … Bond returns were also better than expected."
Doll offered his Ten Predictions for 2018 Thursday but first reviewed the accuracy of his Ten Predictions for 2017: Five correct, one wrong and four partially correct. The sole error: predicting the 10-year Treasury yield would reach 3%. It ended 2017 at 2.4%, slightly below where it began.
Looking ahead to 2018, Doll says, "as long as economic growth and earnings are relatively good (which they are likely to be), equities should be fine, but the gains won't be as strong and smooth as they were in 2017. "We're moving from a smooth gallop to a bumpy grind."
Here are Doll's Ten Predictions for 2018:
Prediction #1:
"If we get to these numbers will be a much more normal environment, which we haven't seen in quite some time," says Doll. He expects unemployment will continue to fall, inflation will remain contained and growth will be supported by the tax cuts that were just enacted by Congress. He doesn't, however, expect much additional "pro-growth legislation."
The last time major tax cuts were enacted, in 1986, trucking, a big barometer of economic activity, picked up on a sustainable basis, and he expects similar gains this time around.
Doll says growth will decelerate moving into 2019 and inflation and rates will be low but maybe rising.
Prediction #2:
"The global economy is doing very well. … The world has never been in better shape," says Doll. That's highly unusual when global trade has remained fairly flat, says Doll. "Synchronistic global growth is achieved usually when foreign trade is growing." could hold growth back. The biggest downside risk to this prediction is protectionist policies, which Doll suggests investors should be watching closely.
Prediction #3:
Doll is predicting that the U.S. unemployment rate will end 2018 at 3.75%, down from 4.1% currently, with a further decline to 3.5%, the low reached in 1969, possible thereafter.
As more people get work, wages will rise, growing at 3% by year-end, up from the current 2.5% rate, says Doll. "Historically when you get to 5% unemployment, wage growth picks up to 4%." With unemployment well below that level, wage growth has been "rather quiet." He counsels investors to "keep your eye on this one because beyond 3%, we begin to have issues with corporate profitability."
Prediction #4:
Yields will move higher because the accommodative policies of central banks is unwinding now or will be in the not-so-distant future, says Doll. The Federal Reserve has already ended its quantitative easing asset purchases, and the European Central Bank and Bank of Japan are in the process of ending theirs, says Doll. "Central banks are moving slowly but surely … from easing to normalizing to eventually tightening."
Although the 10-year Treasury yield rose to 3% during 2014 — in early January — it hasn't ended a year at or above 3% since 2013.
Prediction #5:
Stocks will beat bonds in 2018 because they will rise some while bonds decline, says Doll. That hasn't been the case over the past six years. Stocks rose an average 16% per year while bonds rose 2.5%. Rising rates, which hurt bonds, will eventually impact stocks but not necessarily right away, says Doll, stating that there have been many times that rates rose and so did stock prices.
There are many reasons corporate capital spending should increase this year, according to Doll: chronic underinvestment, strong profitability and rising confidence among corporate CEOs, which are not new. What is new this year is the tax cut bill, which buttresses those reasons and provides some more.
