Thu, 6 Mar 2014
Earnings will need to come through strong if we are to get another good year for stocks in 2014, says Nuveen chief equity strategist Bob Doll.
Jason Stipp: I'm Jason Stipp for Morningstar.
We're about two months into 2014 and checking in on some of the defining trends so far, and also what should be on our radar for the rest of the year.
Joining me is Bob Doll, chief equity strategist from Nuveen.
Bob, thanks for being here.
Bob Doll: Thank you, Jason.
Stipp: We've talked before about how it's time now for the fundamentals to kick in for real earnings and real revenue growth. We're approaching now the end of the fourth quarter reporting earnings season. What does it look like so far: any surprises, any red flags in earnings?
Doll: I think the news has actually been pretty good. Despite some of the current economic data, the news from the fourth quarter [showed that] revenue growth finally picked up. We had, I think it was, five quarters of basically zero, and now it's starting to pick up, which has pushed bottom-line EPS growth up to very high single-digits. So some improvement. We need, as we've talked before, some acceleration this year; I think we're beginning to get it.
Stipp: Is it safe to say that a lot of the stock market returns that we saw last year where pricing existing earnings growth more dearly, and now hopefully we can get the earnings side of that equation moving?
Doll: Absolutely, Jason. I think last year was mostly P/E. You don't get up 30% just from earnings. And this year the earnings are going to have to come through to have that proverbial good year for stocks.
Stipp: You referred to some mixed economic data that we've gotten so far in 2014, including a second disappointing unemployment report [for January]. I think the market actually thought that, if the economy is a little bit slower, the Fed may ease up on this tapering program. We heard from Janet Yellen and it doesn't necessarily seem to be in the cards. Do you think the Fed is going to stray from their course of getting out and doing this exit strategy?
Doll: I think we are going to have to see a whole lot more weakness to back off the tapering process. They've been wanting to get it started. They finally got it started, and it's going to take a lot to slow them down.
The debate, as you well know, is how much of this is weather and how much of this is other stuff that's going to last? My guess is most of it is weather, and I think we have a lot more bad news to come on the weather stuff, including probably at least one more bad employment report.
Stipp: So we can at least brace for that.
Stipp: The emerging markets have been one area of the world that has been affected actually by the tapering, or the talk of the tapering, that happened. We've had already [in 2014] a hot spot, and hopefully not crisis, with emerging markets' currencies, but some real worries there.
Central banks were aggressive in addressing those issues in some of those countries. Is this going to be something we really need to keep our eye on as interest rates normalize in 2014, which you expect they will?
Doll: I think the answer to that question is yes. I think we're through the worst of it. We may have bouts of that problem again.
Remember who benefited the most from the Fed easing in QE1, QE2, and QE3: the emerging markets. So, we got that taste last spring when the Fed teased us with the word "tapering," and the emerging markets sold off hard. Now the real thing has come, and emerging markets are getting hit again. I like to say the developed markets are the dog and the emerging markets are the tail, and the tail is getting whipped around.
Stipp: The central banks are sort of between a rock and a hard place, because if they raise rates--which they need to do to protect some of that money leaving the country and to keep some of it in the country--it also means maybe slowing those economies. So do you think they are going to have the discipline or have the ability to do what they need to do.
Doll: Great question, because that trade-off is not a fun trade-off. I think at the end of the day they probably will, but not without some carnage along the way. It's hard to find an emerging economy that's not going to have slower growth in '14 than '13. By contrast, in the developed world, faster growth in '14 than '13.
Stipp: Well, at least it's balanced as far as where we are going to see some of that growth.
Now let's bring it back to the U.S. In 2014, you predicted that we are going to see some more M&A activity among other things. Of course we heard the Comcast/Time Warner Cable deal, that's far from done, but a big deal already on the radar in M&A.
Do you think, though, that this is the best use for the corporate cash that's on the balance sheet? We are going to see these kinds of activities because of corporate balance sheet cash. Is M&A the best use from an investor's perspective?
Doll: If it were M&A and M&A only, I'd say no. But remember they've been and will continue to buy back their stock and raise their dividends. Now they've added M&A, and I think right behind it, Jason, will be capex. That's the one I'm looking for. Show me you can invest in your business and grow a little bit. That would be the healthiest. But I like the combination of all four of those things, to be honest.
Stipp: And if we see that capex, of course, that's good news for the economy because that business investment can be a boost even if consumers are starting to feel a little shaky.
Doll: Yes, sir.
Stipp: Lastly, you also predicted that 2014 will be a better year for active fund managers. Of course, you're an active fund manager, so you have that perspective on it. But why do you think it's going to be easier for active managers to add value this year?
Doll: There are two reasons: the main one is a cyclical reason. Correlations are falling. When correlations are rising and approaching 1, as they did in the crisis, we active guys really struggle. I know from the 30 years I've been managing money, when correlations are falling, there is this gentle breeze at my back, and when they are rising, it's in my face. And as macro stuff is becoming a little less important, it's the results of the individual companies. That's the main reason.
The secondary reason is there are fewer of us. Because we did such a bad job, a lot have dropped out and the index funds and the ETFs have gotten a lion's share of the delta, if you will, and so markets are a little less efficient. I can find nickels on the floor, I haven't found for a long time.
Stipp: By extension are you saying that you expect to see less risk-on, risk-off trading like we've seen in years past?
Doll: Well, I'm hoping that's the case Jason. But I think that's probably right as well.
Stipp: Bob Doll, it's great to get your perspective on the markets and the economy. Thanks for joining me again.
Doll: Thank you.
Stipp: For Morningstar I'm Jason Stipp, thanks for watching.