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By Jason Stipp | 09-18-2013 11:00 AM

Doll: The Capital's Market Impact

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.

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