Bob Doll: Mid-Year Assessment of Our Ten Predictions

Interesting review of Bob Doll’s ten predictions for the year. They highlight the hazards of making predictions: you can be right for the wrong reasons or wrong for the right reasons.

1 ❓ U.S. and global economic growth improves modestly as the dollar strengthens and reaches parity with the euro.
First quarter U.S. gross domestic product growth was relatively slow at 1.2%, but we think second quarter growth could approach 3%. We are on the wrong side of this second prediction, as the euro has advanced against the dollar.

2 ✔ Unemployment drops to its lowest level in 17 years as wages increase at the fastest pace since the Great Recession.
The first half of this prediction came true in May, when unemployment hit 4.3%, lower than the 4.4% reached in May 2007. Wage growth has remained stubbornly slow, but we expect wages will rise.
[Unemployment fell as expected but I would rate this a “?” as wage growth impacts on inflation and is an important part of the overall scenario.]

3 ❓ Treasury yields move higher for a third consecutive year for the first time in 36 years as the Fed raises rates at least twice.
In June, the Fed raised interest rates for the second time this year. Treasury yields, however, are lower now than at the start of the year.
[“X” IMO. A disconnect between long-term and short-term rates, as in 2004-2005, limits the Fed’s ability to control asset bubbles and inflation.]

4 ❓ Stocks hit their 2017 highs in the first half of the year as earnings rise but price/earnings multiples fall.
Equity markets hover close to their all-time highs, but the momentum that dominated the first part of the year has faded. Earnings have improved dramatically: S&P 500 earnings were up almost 14% in the first quarter, although multiples have risen.
[Stocks rising faster than earnings is typical of a stage III bull market]

5 ❓ Stocks outperform bonds for the sixth year in a row for the first time in 20 years while volatility rises.
Stocks are currently comfortably ahead of bonds. While volatility has actually fallen this year, we expect it to pick up in the coming months.
[Volatility is close to record lows and likely to stay there if no major geo-political surprises.]

6 ❌ Small caps, cyclical sectors and value styles beat large caps, defensive and growth areas.
We are on the wrong side of all three components of this prediction. We expect economic growth to rebound this year, which should lead investors to bid up cyclical and value sectors.
[Large caps and defensive stocks are overpriced because of low yields. Growth stocks are typical of stage III but normally joined by small caps.]

7 ✔ The financials, health care and information technology sectors outperform energy, utilities and materials.
A basket of our favored sectors (up 14.0%) is comfortably outperforming a basket of our least-favored ones (up 2.5%).
[Good call.]

8 ✔ Active managers’ performance improves as flows into equities rise.
Last year, only 19% of U.S. large cap active equity managers beat their benchmarks. As of May, 52% are ahead. The pace of equity fund outflows has also slowed this year.
[I would rate this a “?”.]

9 ✔ Nationalist and protectionist trends rise as pro-domestic policies are pursued globally.
President Trump announced a withdrawal from the Paris climate change accords, has reconsidered trade deals and questioned fellow NATO member states. In Europe, Brexit negotiations are ongoing, although the French presidential election provided a nod back toward globalization.
[Nationalism still dominates.]

10 ✔ Initial optimism about the Trump agenda fades in light of slow legislative progress.
It is almost hard to remember the high level of political optimism when we made this prediction six months ago. Now the pendulum may have swung too far in the opposite direction.
[Good call. Little has been achieved on infrastructure and tax reform.]

[Conclusion: Secular trends, as in #7, make the most reliable predictions, while it’s hard to beat a 50% success rate with shorter cycles.]

Source: Weekly Investment Commentary from Bob Doll | Nuveen

One thought on “Bob Doll: Mid-Year Assessment of Our Ten Predictions

  1. […] Doll highlighted the disconnect between long-term and short-term rates in his latest review. The chart below plots the 3-month T-bill rate against 10-year Treasury […]

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