Nuveen's Robert Doll gave a muted outlook for stocks at the Money Management Institute's conference in Washington, D.C. on Wednesday — but that still makes him more optimistic than most.
Mr. Doll, long known for his annual top 10 predictions, is looking for a 7% return from stocks this year, assuming 5% earnings growth, flat price-to-earnings ratios, and 2% in dividends.
His main source of optimism: U.S. consumers, who are in better shape than most people give them credit. The U.S. has created more jobs in the past five years than any five-year period in history, Mr. Doll said. “And, contrary to popular belief, most are full-time jobs,” he noted. Consumers are also seeing wage increases as labor shortages start to show up.
Two other factors favor the consumer: Household balance sheets are much better than they were in the depths of the recession, and oil prices are dramatically lower. “That's more powerful for the U.S. consumer than any tax cut,” Mr. Doll said.
Overall, the consumer sector should grow 2.8% to 3% after inflation this year. But U.S. gross domestic product should grow a bit more than 2% because of the headwinds from U.S. trade and manufacturing, he said.
His 10-year forecast for a traditional balanced portfolio of 60% stocks and 40% bonds: 4% to 5% annual returns, or about 3% after inflation. Investors should be able to boost returns by overweighting three sectors:
• Technology. In a slow-growth economy, companies with lots of free cash are king, Mr. Doll said. The industry with the most free cash flow is tech.
• Banking. While more of a trade than a long-term investment, Mr. Doll thinks banks are in good shape. Investors might not realize that, however, until after the next recession.
• Telecommunications. There's better growth in telecomm than utilities, and so he's looking for dividend yield in the telecom sector.
While low, Mr. Doll's long-range predictions are actually more optimistic than those at other major investment firms, such as BlackRock and GMO. Both firms are forecasting single-digit returns for U.S. stocks over the next few years.
Mr. Doll backed off from his prediction, made at the start of the year, that Republicans would gain control of the House, Senate and executive office. Like many, he discounted the possibility of Donald Trump keeping his lead in the Republican primary elections.
Mr. Doll is chief equity analyst and senior portfolio manager with Nuveen Asset Management. Prior to his position at Nuveen, he was chief investment officer at BlackRock Investment Management and Merrill Lynch.