Mon, 23 Sep 2013
As Washington is in full market view--with the Fed's potential tapering, Bernanke's successor, and the debt-ceiling debate--Nuveen's Bob Doll addresses the possible outcomes and their effects.
Jason Stipp: I'm Jason Stipp for Morningstar. In the market, it's all eyes on Washington and the Fed, as big news coming out there could affect the markets, but what should investors key in on? Here to offer some insights is Bob Doll, chief equity strategist at Nuveen and a senior portfolio manager.
Thanks for being here, Bob.
Bob Doll: Thank you, Jason.
Stipp: The Fed obviously wants to taper. I think that there are some questions outstanding about the effects ultimately of that. You have one side that says the stimulus hasn't really been that effective anyway, so removing it, one might have to say perhaps wouldn't have a big impact. On the other side, a lot of people are saying the Fed's activity has really underpinned much of the market's valuation. As we're trying to assess what ultimately a tapering program could mean for the market, where do you come down on that? How do you get a handle?
Doll: First, [let's discuss the] view that the Fed, as you point out, wants to taper. When the federal budget deficit was a lot bigger than it is today, buying $85 billion of paper per month had one meaning. Today, it has a much more significant meaning, because there is less issuance of paper out there. Look, the market has expectations about the Fed's taper program, and if they deviate from that significantly, that will have a market effect. I think you cannot argue with the fact that the Fed has had a positive impact on a lot of things, certainly the markets, and I would argue, certainly the economy--people says it's one or the other. No, it's both.
The economy wouldn't be even as strong as it is, which isn't very, if it weren't for the Fed, and markets wouldn't be where they are. [The Fed's] judgment that it's time to start the tapering process is that the economy is doing a bit better, which I concur, and [the bond-buying] is not needed as much. Then if you go behind the scenes, there are many Fed governors who've said in a speech one way or the other that [the first round of quantitative easing and QE2 worked]. But for Q3, did it [work] or didn't it? And it's expensive; let's continue to move out. So they will taper.
Stipp: Do you think that the economy is ready to take the baton from the stimulus program?
Doll: Yes, as you well know, it's not black or white; it's a gray process. I've likened it to the following. When the Fed was buying $85 billion a month, having gone from buying nothing, having reduced interest rates long before that, they became in effect a 100-miles-per-hour tailwind for investors and for the economy. As they begin the taper, that becomes an 80-miles-per-hour tailwind. There is nothing wrong with an 80-miles-an-hour tailwind, unless you've got used to 100. And therein lies the rub. [The Fed is] still our best friend, but maybe a little less best friend than they were.
Stipp: The other uncertainly around the Fed right now is who will be the next Fed governor. There is a lot of handicapping of the options out there. Will this make a big difference though? If one choice is made over another, could it have a material impact on what we might see for the economy in the Fed's activities?
Doll: I think it probably has less impact with Person A versus Person B than we all make it out to be. We make these big headlines, and we talk about it. But, look, it's not just one person--although that's the leader--it's a staff. People under it who are not elected or appointed officials are there for a long time, and they keep doing their thing day in and day out. The Fed's become more transparent, so the leader doesn't have the only voice, if you will.
Having said that, it's pretty important who the Fed chair is going to be, and obviously the odds-on choice these days is Janet Yellen. [She offers] as much continuity from Ben Bernanke as you can find; steady as she goes, fully capable, bright lady. Frankly, from where I sit as a capital market participant, I'd be very happy if she were the nominee.
Stipp: Also in Washington, a lot of people are watching what's happening in Congress. We have the debt ceiling. There is potential defunding of government programs. There is a potential government shut-down. [Is there] anything going on right now in the government that could have a material impact, not just short-term noise, but a material impact for investors?
Doll: Anytime the government threatens to shut down, you got to be worried because it causes dislocation. It causes the absence of a belief that we have coherent leadership on either side of the aisle, and that probability is nonzero and seems to be growing with each passing day. We've spent a lot of time on the Fed chairman issue of late and the tapering issue of late. Pretty soon the spotlight is going to be full-bore on Washington, D.C., and all the things you just listed. In my view, because you have disunity within the Democrats and disunity within the Republicans, let alone across the aisle, we've got a long road to hoe, and we don't need a government shut-down. It would not be great for markets.
Stipp: What about the debt-ceiling debate again coming up? How much real damage might get done if [Congress] can't resolve this, as far as the government's credit rating and the ripple effects that could come out from that?
Doll: In the long run, almost none. It's a political football, and both sides will try to maximize their chances. I hate to be so skeptical, but all they're looking to is what move can we make to increase our probability of winning in 2014. That's a lot of the calculus that's going on. We'll get through it. I just can't tell you how and which month or how much disruption will be between here and there.
Stipp: Bob, in the investment realm we talked before about stocks versus bonds and the relative attractiveness there. Now that we've seen yields come up a little bit--and obviously bonds have taken a hit--are fixed-income investments looking anymore relatively attractive to you?
Doll: You have to, I guess, say they're a little more relatively attractive than they were when the 10-year Treasury yield was 100 basis points lower than where it is today. Having said that, I think more people are appropriately on the bandwagon to understand the economy is slowly improving here in the U.S. and globally, that stocks are still cheap relative to bonds, and we're going to get this slow, steady rotation. It's not an event, it's a long process.
Stipp: All right, Bob, always great to hear your insights. Thanks for giving us the overview.
Doll: Thank you, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.