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


From nearly perfect to less perfect

We expect a year marked by continued decent economic growth and corporate earnings as well as low but rising inflation and yields. We anticipate more market volatility and less of a tailwind from the political backdrop. In all, this should create a still-good environment for stocks but not a continuation of the perfect world from last year.

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01 U.S. real GDP reaches 3% and nominal GDP 5% for the first time in over a decade. Read more Show less Watch video

The negative impacts from the financial crisis have finally moderated. This backdrop, combined with a significant corporate tax cut and a rising capacity utilization rate, should lead to a return to somewhat more normal growth. Late in 2017, the Leading Economic Indicator series finally rose above its pre-recession level. In the past, this led to on average six more years of economic expansion, with the shortest additional expansion period being four years.1

Prediction 1Watch Video

02 Despite ongoing protectionism, the global expansion continues with the fewest countries in recession in history. Read more Show less Watch video

We expect global growth to continue increasing at a time when global trade is not expanding. Typically in an expansion, imports and exports are among the fastest growing segments of the global economy. But anti-trade sentiment in the United States and elsewhere has held this back. Investors need to keep a careful eye on protectionist threats to global growth.

Prediction 2Watch Video

03 Unemployment falls to the lowest level in nearly 50 years as wage growth is the highest since the Great Recession. Read more Show less Watch video

We expect unemployment to fall again in 2018, dropping to below 4%. Meanwhile, wage growth has remained fairly quiet, but last year wages were slowly starting to rise. We expect that trend will continue as a shortage of workers, robust corporate profits and generally strong corporate conditions manifest themselves.

Prediction 3Watch Video

04 The yield curve flattens (but does not invert) as the 10-year Treasury yield reaches 3% for the first time since 2014. Read more Show less Watch video

There are several reasons why rates are likely to increase in 2018, including a pickup in inflation. In fact, we view a rise in inflation as probably the biggest threat to the financial markets in 2018. It is important to note that we expect a flattening yield curve, with the Fed raising rates faster than the curve moves up in yield, but a flattening curve is not a good predictor of equity prices. Equities tend to sag only after a period of time when the yield curve inverts, which we do not expect in 2018.

Prediction 4Watch Video

05 Stocks enjoy longest bull market in history but experience a 5+% correction after the longest period without one. Read more Show less Watch video

While we expect the bull market to continue and become the longest in history, we also expect the uninterrupted strings of advances to fade and occasional pullbacks as interest rates and inflation rise. A solid earnings outlook, still-benign inflation and interest rate environments, along with the absence of sentiment or technical warning signs, underlie our generally sanguine outlook.

Prediction 5Watch Video

06 U.S. equity returns lag earnings growth for the first time in six years, the longest streak in decades. Read more Show less Watch video

U.S. stock returns have outpaced earnings in each of the last six years, the longest streak on record. The last time equity appreciation exceeded earnings growth for a sustained period of time was 1995-1999.2 We expect the current streak to end in 2018, meaning earnings will outpace stock market returns. Earnings expectations for 2018 are now high – justifiably so - but in our view they will be difficult to exceed.

Prediction 6Watch Video

07 Equities beat bonds for the seventh consecutive year for the first time in nearly a century. Read more Show less Watch video

From 2012 until the middle of 2016, stocks outperformed bonds even though bonds continued to do well. In contrast, since mid-2017 interest rates have been rising irregularly, so the hurdle rate for equity outperformance has fallen. Equities may be vulnerable to pullbacks in response to rising bond yields, but a major decline in stock prices looks unlikely as long as growth and earnings are improving.

Prediction 7Watch Video

08 Corporate capital expenditures increase at the expense of share buybacks. Read more Show less Watch video

We think the chronic underinvestment in capex this business cycle, strong profitability, the low cost of capital, improved economic confidence, lowered corporate tax rates, the repatriation of foreign earnings and the expensing of capex in the new tax bill will combine to show an increase in business fixed investment by maybe 6% or more in 2018. At the same time, tax changes that limit interest expense deductions should curtail share buybacks.

Prediction 8Watch Video

09 Telecommunication services, information technology and health care outperform utilities, energy and materials. Read more Show less Watch video

The technology sector features companies with strong earnings and solid balance sheets. Health care looks to be the best positioned among the defensive growth sectors. We are including telecom services as a projected outperformer for its outsized yield, reflecting its out-of-favor sentiment. In contrast, utilities are not cheap and have poor growth prospects, while the deeper cyclical sectors of energy and materials appear expensive with mixed supply/demand fundamentals.

Prediction 9Watch Video

10 Republicans lose the House, retain the Senate and further distance themselves from President Trump. Read more Show less Watch video

The long list of Democrats up for reelection in states where President Trump won by a wide margin provides some hope for the Republicans that they will retain the Senate, but the poor polling of the president and the Republican Congress means the Democrats may well retake the House. Whatever the outcomes, we expect many congressional Republicans will further distance themselves from the president. For markets, it probably means little, if any, significant legislation after the tax bill.

Prediction 10Watch Video



2018: A shift from nearly perfect to less perfect

Bob Doll explains important economic and market shifts that may occur over the coming 12 months—and what to do about them.

2018: A shift from nearly perfect to less perfect

Ten Predictions for 2018

Our scorecard from 2017 and what we expect from 2018

Bob Doll's Ten Predictions for 2018: From nearly perfect to less perfect


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1 Evercore ISI
2 Bank of America Merrill Lynch Research

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, LLC 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, LLC.

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