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

2017 Ten Predictions:

A Year of Transition as Markets
Return to Fundamentals

We expect the coming year to be marked by a series of changes: A shift from secular stagnation and deflation fears to an environment marked by somewhat better growth, higher inflation and rising interest rates. This environment should provide some tailwinds for equities, but also creates challenges. In this sort of market, we think individual security selection will be critical for investment success.

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01 U.S. and global economic growth improves modestly as the dollar strengthens and reaches parity with the euro. Read more Show less Watch video

Correctly forecasting economic growth for the coming year looks to be more difficult than usual. The aging business cycle, rising interest rates, climbing dollar and continued slow productivity growth all create formidable headwinds. On the positive side, the recent election has unleashed a significant increase in consumer and business confidence. We forecast another relatively mediocre year of growth in 2017, somewhere around 2% real GDP growth. We also expect the dollar to exhibit further strength and reach parity with the euro sometime in 2017.

Prediction 1Watch Video

02 Unemployment drops to its lowest level in 17 years as wages increase at the fastest pace since the Great Recession. Read more Show less Watch video

2016 was a strong year for jobs growth: Average monthly new jobs averaged approximately 185,000. We think the average will remain above 150,000 in 2017. The current 4.6% unemployment rate could drop further next year to below the 4.4% rate reached in May 2007.1 Average hourly earnings growth bottomed at below 2% two years ago and could exceed the 3.1% level they hit in June 2009.1 We are also watching to see if the participation rate experiences a cyclical pickup.

Prediction 2Watch Video

03 Treasury yields move higher for a third consecutive year for the first time in 36 years as the Fed raises rates at least twice. Read more Show less Watch video

We have clearly reached an inflection point with the Fed and with interest rates more generally. The 10-year Treasury yield peaked at 15.84% on September 30, 1981, then declined irregularly to 1.37% on July 8, 2016.1 We think this low marked the end of a 35-year bull market in bonds. The final chapter of that bull market involved the Fed moving the fed funds rate to the “emergency” level of zero during the Great Recession. Since then, attempts at reflation in the U.S. and globally have been mixed, but finally seem to be working. As 2016 drew to a close, the Fed pointed to multiple rate increases in 2017 and 2018.

Prediction 3Watch Video

04 Stocks hit their 2017 highs in the first half of the year as earnings rise but price/earnings multiples fall. Read more Show less Watch video

As with our economic forecasts, our stock market prognostications for 2017 are tougher to make than usual. The post-election “animal spirits” environment has buoyed the stock market. Possibly more important, the market surge has also been driven by improving economic indicators since October. While we expect pro-growth measures to be passed in 2017, we see two caveats. First, passing them will not be as easy as the current euphoria suggests. And they are unlikely to take effect until January 1, 2018. Couple this with a slow but likely increase in inflation, and we think a tug of war between rising earnings expectations and eventual valuation (P/E multiple) deterioration will suppress equity prices. As a result, we may witness the 2017 high in stock prices in the first half of this year.

Prediction 4Watch Video

05 Stocks outperform bonds for the sixth year in a row for the first time in 20 years while volatility rises. Read more Show less Watch video

It hasn’t happened in two decades, but we think stocks will beat bonds for six years in a row. For much of 2016 before the year-end rally, stocks yielded more than bonds.1 This highlights both the overvaluation of Treasuries and the undervaluation of stocks relative to bonds. In our experience, it is not uncommon to see stocks outperform bonds with stocks rising and bonds falling in the latter stages of a bull market. If real and nominal growth increase, it will likely be a difficult environment for fixed income. But it could also be favorable for equities. We also expect volatility in both asset classes to rise.

Prediction 5Watch Video

06 Small caps, cyclical sectors and value styles beat large caps, defensive and growth areas. Read more Show less Watch video

This prediction would be easier if the rally in small caps, cyclicals and value stocks that began in the second half of 2016 and accelerated after the election hadn’t been so strong. But we expect these trends will continue despite the gains. After a period of noticeable underperformance, small cap stocks have begun to beat large cap stocks due to the rise in the dollar, expected tax changes and weakening global trade. Cyclicals should beat defensives as growth accelerates and incomeoriented stocks continue to underperform. Valuation for cyclicals is supportive as well. Finally, value over growth (which is positively correlated to cyclicals over defensives) should occur as growth accelerates and inflation rises.

Prediction 6Watch Video

07 The financials, health care and information technology sectors outperform energy, utilities and materials. Read more Show less Watch video

Financials have been the leader since the election and should benefit from regulatory easing in 2017. Financials also feature cheap valuations. Health care presents a good opportunity beyond headline risks, and information technology offers both good growth and value characteristics. Conversely, we continue to believe global growth will not provide the pricing power necessary for energy and materials to shine. Finally, utilities represent the intersection of yield, perceived safety and low volatility — a combination that has underperformed recently and may continue to do so.

Prediction 7Watch Video

08 Active managers’ performance improves as flows into equities rise. Read more Show less Watch video

The period of extended significant inflows into bond funds and outflows out of equity funds may be ending. Improvements in nominal growth argue for a reversal and relative valuations also look supportive. Investors have experienced an unusual confluence of events — slow growth, deflation, macro-dominated markets, falling interest rates and high correlations within and across asset classes — that are likely fading, if not reversing. Active equity managers have struggled in recent years, but perhaps the stars are finally aligning for a long-awaited reversal in this trend.

Prediction 8Watch Video

09 Nationalist and protectionist trends rise as pro-domestic policies are pursued globally. Read more Show less Watch video

The 2016 global political environment was marked by a rejection of establishment policies and a rise in nationalism, protectionism and isolationism. The Brexit vote, the Trump election and the Italian referendum all symbolize this shift and point to a world in which many countries are withdrawing from the global economy. In general, we believe more globalization and more trade are healthy for global GDP growth, so moves in the opposite direction are worrisome. This issue won’t be decided in one calendar year, but should be monitored carefully.

Prediction 9Watch Video

10 Initial optimism about the Trump agenda fades in light of slow legislative progress. Read more Show less Watch video

Optimism surrounding the Trump agenda is high, as investors are expecting tax reform, increased infrastructure and military spending and a rollback of regulations. While we believe fundamental change is on the way, it may not be as easy as it appears. In particular, such comprehensive legislation is rarely simply crafted and passed without significant revision. Secondly, most of the contemplated agenda is likely to be passed in 2017, but won’t take effect until 2018. Additionally, the mood of the markets may sour if Donald Trump’s protectionist rhetoric (largely absent from post-election proceedings) resurfaces.

Prediction 10Watch Video



2017 Ten Predictions

Access the full Ten Predictions brochure, which includes a 2016 scorecard and a detailed outlook for 2017.

Ten Predictions for 2017: A Year of Transition as Markets Return to Fundamentals

When One Plus One Is More Than Two

Learn how we combine the art of fundamental research with the science of quantitative analysis to create an investment process that is more than the sum of its parts.

When One Plus One Is More Than Two

2016 Elections Recap:
What the Results Mean for Investors

How might the new political environment in 2017 affect investment decisions?

2016 Elections Recap: What the Results Mean for Investors


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1 Source: Morningstar Direct, Bloomberg and FactSet as of 12/31/16.

A Word on Risk
The opinions expressed by the author are for informational 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. These views may differ from other investment professionals at Nuveen Investments and are 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 time period. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-investment grade bonds involve heightened credit risk, liquidity risk, and potential for default. An investment in any municipal portfolio should be made with an understanding of the risks involved in investing in municipal bonds, such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. Clients 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. 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. Past performance is no guarantee of future results. Short sales is a speculative technique and may cause a loss when the price of a security that it holds long decreases or the price of a security that it has sold short increases. The real estate industry is greatly affected by economic downturns that may persist as well as changes in property values, taxes, and regulatory developments.

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

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