Robert C. Doll, CFA
Senior Portfolio Manager,
Chief Equity Strategist
Nuveen Asset Management, LLC

2016 Ten Predictions

A Rocky Path as Hope Emerges

We think 2016 will be another difficult year for investors. The economy should grow but remain constrained. Earnings could improve, but some areas will continue to struggle. This backdrop is likely to produce a modest year for equities, but we expect stocks to outperform bonds for another year. At the same time, we think we will start to see a shift in market leadership.

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01 U.S. real GDP remains below 3% and nominal GDP below 5% for an unprecedented tenth year in a row Read more Show less Watch video

Mediocre economic growth and relatively low inflation have been the hallmark of the current expansion. We don’t expect that will change in 2016. Never before in U.S. history has real growth stayed below 3% and nominal growth below 5% for ten years in a row.1 Yet, we think this will happen in 2016. We expect growth will continue to be modest. While inflation may tick higher, it should do so slowly. From a global perspective, the U.K. and the eurozone should be positive contributors while Japan, China and commodity-based economies will likely create a drag on growth.

Prediction 1Watch Video

02 U.S. Treasury rates rise for a second year, but high yield spreads fall Read more Show less Watch video

Treasury yields have been rising unevenly for several years. Many forget (or missed) the fact that 10-year Treasury yields bottomed at 1.43% in July 2012.2 Since then, rates have meandered irregularly higher as economic growth advanced and the Fed continued to slowly move toward normalization. High yield spreads expanded near the end of 2015, especially in energy and related areas. We think decent economic growth and low defaults will cause spreads to narrow in 2016.

Prediction 2Watch Video

03 S&P 500 earnings make limited headway as consumer spending advances are partially offset by oil, the dollar and wage rates Read more Show less Watch video

The most significant headwind for equities in 2015 was constant pressure on earnings. We don’t expect the dollar to climb as significantly as it did in 2015, and believe oil prices are bottoming. These twin headwinds should lessen. Upward pressure on wages, however, could emerge as a new problem for earnings. Higher levels of consumer spending should provide modest revenue growth, and ongoing corporate buybacks should allow some degree of earnings growth. A notable risk to our view is potential pressure on corporate profit margins, which should be watched carefully.

Prediction 3Watch Video

04 For the first time in almost 40 years, U.S. equities experience a single-digit percentage change for the second year in a row Read more Show less Watch video

Although the average long-term annual rate of return for equities is in the high single digits, markets rarely deliver single-digit returns.3 And it is especially rare for equities to do so in consecutive years. In fact, this last happened in the United States in 1977 and 1978.3 We think a large upside or a large downside move (meaning a double-digit percentage gain or loss) is unlikely given the crosscurrents. While fundamentals should improve somewhat in 2016, the Fed will be less friendly than in recent years. Similarly, arguments exist on both sides of the valuation and sentiment discussions. In our view, the bull market will likely continue, but the “easy” money has already been made. Earnings growth in 2016 is likely to be the key variable to stock market returns.

Prediction 4Watch Video

05 Stocks outperform bonds for the fifth consecutive year Read more Show less Watch video

Our best guess is that equities will be up modestly and the broad bond market will lag, weighed down by rising Treasury yields. Historically, equity prices have risen in the twelve months following the first Fed rate hike.4 In contrast, we think many areas of the bond market may struggle in the face of rising rates. Accordingly, we favor an overweight in equities versus bonds, and would be especially wary of U.S. Treasuries.

Prediction 5Watch Video

06 Non-U.S. equities outperform domestic equities, while non-U.S. fixed income outperforms domestic fixed income Read more Show less Watch video

Generally speaking, U.S. equities and fixed income have outperformed their non-U.S. counterparts over the last few years.2 Assuming global growth improves, the United States will likely surrender its years-long market leadership. Today, we think the United States is growing more robustly than the rest of the world, but we may be near the peak of U.S./global divergence. Additionally, with the Fed raising rates and many other regions remaining in easing mode, U.S. fixed income may struggle on a relative basis. On a related note, we believe the mantle for fastest growing emerging country has been passed from China to India.

Prediction 6Watch Video

07 Information technology, financials and telecommunication services outperform energy, materials and utilities Read more Show less Watch video

As we saw in 2015, we think free cash flow and unit growth will be keys to success in 2016. From a sector standpoint, we favor technology, (a sector with growth and value, domestic and international, and cyclical and defensive choices), financials (which should benefit from rising interest rates) and telecommunications services (a relatively cheap, defensive sector). We remain cautious on the deeper cyclical areas, and low energy prices should weigh on the energy and materials sectors. As for utilities, this proxy for the bond market will likely struggle as rates rise. We also have a modest preference for large caps over small caps and growth styles over value (our style preferences may shift if global economic growth broadens.)

Prediction 7Watch Video

08 Geopolitics, terrorism and cyberattacks continue to haunt investors but have little market impact Read more Show less Watch video

Unsettled and skeptical investor attitudes are partially fed by the increase in terrorism and cyberattacks, as well as a growing list of geopolitical hot spots. Sadly, these issues will likely remain in 2016. The human cost of these issues is heartbreaking, but experience shows that any market impacts will likely be small and temporary. Cyberterrorism has unfortunately become a way of life and will likely only increase as technology advances.

Prediction 8Watch Video

09 The federal budget deficit rises in dollars and as a percentage of GDP for the first time in seven years Read more Show less Watch video

The federal budget deficit shrank by 70% from its 2009 peak by the end of 2015.5 This drop was as a result of the sequestration following earlier budget impasses, as well as improved tax receipts from a growing economy. With the recently passed budget bill, the fiscal austerity era is over. Rising deficits and debt present long-term issues, but there is a silver lining: Increased spending means the federal government should contribute positively to economic growth after years of being a drag.

Prediction 9Watch Video

10 Republicans retain the House and the Senate and capture the White House Read more Show less Watch video

At this point, the outcome of the Presidency, the Senate, and possibly even the House, is in question. Conventional wisdom (and poll numbers) suggests Democrats will retain the White House and have a good shot of capturing the Senate. Nevertheless, we are going out on a limb (perhaps foolishly) and arguing for a Republican sweep. The biggest question today is whether the Republicans can unify around an electable candidate.

Prediction 10Watch Video

RESOURCES

Brochure

2016 Ten Predictions

Access the full Ten Predictions brochure, which includes a 2015 scorecard and a detailed outlook for 2016.

Investors See Glimmers of Hope Along a Rocky Path
Presentation

2016 Ten Predictions Presentation

Bob provides his Ten Predictions for 2016 and discusses investment themes that may shape the coming year.

2016 Investment Outlook - Ten Predictions from Bob Doll (presentation)

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1 Source: Bureau of Economic Analysis.
2 Source: Morningstar Direct, Bloomberg and FactSet as of 12/31/14.
3 Source: Ibbotson.
4 Source: Nuveen Asset Management, FactSet and Bloomberg.
5 Source: Cornerstone Macro, BofA Merrill Lynch.

A Word on Risk
The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Dividends are not guaranteed. Prices of equity securities may decline significantly over short or extended periods of time. Debt or fixed income securities are subject to market risk, credit risk, and interest rate risk, call risk, tax risk, political and economic risk and income risk. Interest rate risk, as interest rates rise, bond prices fall. Investors should contact their tax advisor regarding the suitability of tax-exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on state of residence. Income from municipal bonds held by a portfolio could be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Non‐U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. Commodity futures and forward contract prices are highly volatile. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes, and international economic and political developments.

Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc.

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