2015 Ten Predictions

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

Investor Sentiment Moves from Skepticism to Optimism

“Looking at the year ahead, it appears the main themes will be a strengthening U.S. economy, an uptick in interest rates, slowly improving global growth and improving confidence. I believe equities are poised for additional gains, but volatility is likely to rise and security selection will become more critical. With that backdrop, following are my ten predictions for 2015.”

— Robert C. Doll, CFA

01 U.S. GDP grows 3% for the first time since 2005.

If 2015 resembles the first quarter of 2014, we’ll be on the wrong side of this prediction, but if the coming year looks anything like the last three quarters of last year, this one would be easy to achieve. The U.S. economy looks increasingly able to stand on its own two feet and no longer requires first aid from the Fed. With the exception of exports, the key parts of the U.S. economy are improving. Especially impressive is the growth in jobs and the uptick in business and consumer sentiment. While falling oil prices have some negative economic consequences, the positives to consumers and other users of oil should be a net benefit.

02 Core inflation remains contained, but wage growth begins to increase.

Notwithstanding falling oil prices, we believe core inflation has been moving from around 1% to closer to 2%. In the coming year, we expect wage growth will start to rise as the unemployment rate has dropped below 6%. The United States is in the process of moving into the second half of its expansion, and in most cases wages begin to increase when an economy is more mature. Such an increase doesn’t necessarily presage a significant pickup in broader inflation measures, but it does require careful monitoring.

03 The Federal Reserve raises interest rates, as short-term rates rise more than long-term rates.

Rates remained surprisingly low for several years, but we expect the Fed will increase interest rates this year. We also believe that Treasury yields will advance, with the short end of the curve leading the way. Our logic is that while a zero fed funds rate and a 10-year Treasury yield of around 2% may have been consistent with 3% nominal growth, the United States has moved beyond that relatively slow growth environment. With nominal GDP growth approaching 5% and unemployment below 6%, we think rates are due to increase. We would also point out that rising rates present risks for some fixed income investments.

04 The European Central Bank institutes a large-scale quantitative easing program.

In order to avoid deflation and to reduce pressure on the eurozone, the ECB may be forced to become more aggressively accommodative. We expect that Germany, the consistent naysayer to quantitative easing, will finally allow policymakers to enact a meaningful attempt at efforts to combat deflation (which would also put further downward pressure on the euro). Absent such an attempt (and even with it), Europe risks falling into the disinflationary/deflationary spiral that has long haunted Japan. Our belief (and hope) is that ECB efforts will commence in the first quarter.

05 The U.S. contributes more to global GDP growth than China for the first time since 2006.

After years of spectacular growth, we are seeing evidence of an economic slowdown in China. This is occurring just as the United States is gaining some self-sustaining growth momentum, resulting in the possibility of the United States contributing more to global GDP growth than China for the first time in nine years. China is currently experiencing negative growth rates in imports and freight activity, and slowing growth in auto sales and electricity consumption. These trends are echoed in declining consumer confidence. We also think it is possible that U.S. real growth will surpass that of the emerging market economies for the first time since 1999.

06 U.S. equities enjoy another good yet volatile year, as corporate earnings and the U.S. dollar rise.

We expect U.S. stocks will rise for a seventh consecutive year, and have a good chance of outperforming cash, bonds and commodities, while also outpacing inflation. We anticipate continued strength in equity markets due to an improving economy, solid earnings growth, an improving job market, rising consumer and business confidence, strong corporate financial health, the stimulus from low commodity prices and financing costs, a rising dollar and the manufacturing renaissance.

07 The technology, health care and telecom sectors outperform utilities, energy and materials.

Stock selection typically becomes increasingly important as a bull market matures, and we do not expect this one to be an exception. We continue to think that free cash flow and U.S.-sourced earnings will be key factors in separating winners from losers. From a sector standpoint, we favor one growth-oriented cyclical sector (technology), one defensive growth area (health care) and one traditional defensive sector (telecommunications). We have a less favorable view toward the bond-like utilities sector and two deep cyclical sectors that require pricing power to outperform (energy and materials). We also have a modest preference for large caps over small caps and growth styles over value.

08 Oil prices fall further before ending the year higher than where they began.

A major 2014 surprise was the massive decline in oil prices. Although weak global economies have caused numerous downgrades in demand forecasts, the major reason for the price decline has been the significant increase in supply, especially from the United States. Unlike earlier periods of price decline, when Saudi Arabia reduced supply to shore up prices, oil producers have not yet curtailed supply. As a result, we expect a further decline in prices in early 2015, followed by some firming during the rest of the year as production levels begin to trail off. Beneficiaries of lower oil prices include consumers, airlines, travel, hotels and fast food producers. Energy producers and related capital goods companies would likely be hurt by lower prices.

09 U.S. equity mutual funds show their first significant inflows since 2004.

To date, this has been the least believed bull market in decades. The primary theme of our investment outlook is investors moving from skepticism to optimism, or from disbelief about the bull market to belief. We expect this will translate into investors buying U.S. equity mutual funds in a meaningful way. We believe investor and consumer confidence will rise as consumers increasingly find jobs and enjoy real wage increases. This should prompt investors to become more willing to purchase equities, and equity mutual funds in particular.

10 The Republican and Democratic presidential nominations remain wide open.

While the Republican selection process is generally believed to be wide open, most expect Hillary Clinton will soon have the Democratic nomination sewn up. But our view is that the Democratic nomination process may be messy as well. Hillary Clinton is widely viewed as a “corporate” candidate when populism is rising and voters tend to reject candidates of “inevitability.” In the meantime, the big Washington, D.C., question is whether President Obama and the Republican Congress will find common ground to enact some much-needed legislation. Issues on the agenda with some probability of being enacted include immigration reform, the Keystone Pipeline expansion, crude oil exports, trade legislation, infrastructure spending and corporate tax reform.

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Market Update with Bob Doll
March 2015

Bob discusses where he believes the equity markets may head.

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What to Expect for the Rest of 2015?

What Should You Expect for the Rest of 2015?

Bob Doll gives an update to his 2015 Ten Predictions.

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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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