Long-Term Investors: Don't Fear the Taper

Jason Stipp: The market took a few twists and turns for investors in 2013, but mostly headed upward. So where are we now?

I'm checking in today with Bob Doll, chief equity strategist at Nuveen, to get a sense of what the market was in 2013, and where we stand today.

Thanks for joining me, Bob.

Bob Doll: Thanks, Jason.

Stipp: We started 2013 with the government in focus with the fiscal cliff, then later in the year we had the debt ceiling, the government shutdown, and now close to the end of the year, we have a budget proposal that hopes to take some of these issues off the table for us next year.

What's your take on that proposal and how the market might respond to it as it moves its way, hopefully, to passage?

Doll: As many have called it, this is a small-ball deal. But the point is, it's a deal, and that's the difference. We've had so much acrimony, and I think the fact the Republicans and the Democrats can come together on something--as small as it is--and more importantly take all these issues and postpone us having to worry about them for some time is a very good move.

Stipp: There are still a lot of long-term issues, though, that they really didn't touch in this proposal, so should we really see it as a short-term achievement at this point?

Doll: You are absolutely right. There are other issues--not the least of which is the huge runup in entitlements that is coming in the out years. But in the meantime, I think to get some progress … as you know, both the far right and the far left are pretty disappointed. That probably means we have decent deal.

To put it in perspective, Jason, all we need to know about Washington, D.C., is we have the most dovish Fed, perhaps ever, and the federal budget deficit falling every day of the week. This is a good thing. The rest of it is a lot of noise.

Stipp: One thing that the market has had a hiccup over is talk of the Fed tapering. You mentioned the Fed there has been dovish, but I think a lot of the governors do want to start to take some of that [stimulus] away.

I guess the question, though, is, if I'm a long-term investor, if I'm looking past next year or even the next two or three or four years, what should I be thinking about this taper talk? Is it really going to have an impact on the decisions I make today for my equity portfolio?

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Doll: Great question and the right question. My guess is no, it doesn't.

Let's face it: We've had a Fed over the last [five-plus] years that's had the pedal anywhere from accelerating to right down to the floor. At some point, they are going to go the other direction, and while tapering is different from tightening, there is no question you can't tighten until you've tapered first. And so the direction investors need to keep in mind is, the world is healing and probably going to show a little broader growth in 2014, permitting the Fed to do what we all want them to do: go back to normal someday, folks. And when we do, the world will be back to normal, too.

Stipp: So, we'd really like to see the baton go from stimulus to actual economic growth to bolster the economy and the markets.

Doll: Bingo. As we saw earlier in the year, when the Fed postponed tapering, they are only going to do if the economy is acceptable.

Stipp: One thing about the taper talk, though, is that it has shown the market is really sensitive right now, which could imply that valuations are a little lofty. Do you think that's the case? If I want to set my expectations for next year, should I set them thinking that the market might look a little rich now?

Doll: I think that's not unfair. I've put it this way: We've been in a long ballgame of P/E ratios moving up, valuations going up. I don't think the ballgame is over, but I do think we're in the later innings--meaning, if we're going to have a meaningful move up from the stock market at this point forward, we need visibility on better revenue and earnings growth. I think we'll get it, but we can't rely on P/Es to carry us a whole lot further.

Stipp: We're going to have to start to see fundamentals--again passing that baton, hopefully?

Doll: Yes, sir.

Stipp: At the beginning of the year, you correctly called that we would see some progress in Europe and stabilization there, and we did in fact see that. Europe has not been the flare point that it had before. Can we take this off the table as a risk for the U.S. stock market, or should we still keep our eye on what's happening in Europe?

Doll: A backburner for sure. Not over. We still have one monetary policy and a different fiscal policy for every country [in Europe], and while they made, when their backs were to the wall three years ago, enormous progress on that front, it's still not solved. So, I don't think we can say Europe is a-OK for ever more.

Stipp: Lastly we just had Emerging-Markets Week on Morningstar.com. Emerging markets have really disappointed investors this year. I think they didn't do as well as you hoped that they would do at the beginning of the year.

Can we say that these are just gains deferred, or is there a difference in the fundamentals of emerging markets now that would suggest that … they shouldn't have done well [in 2013]?

Doll: Tough to answer that question, because I don't think we know. My view is, it has been more cyclical than secular. World growth was slower than expected, commodity prices were weaker--that invited some liquidity and some credit problems. No wonder emerging markets did poorly if you had anticipated all that.

I am still a sucker for the long-term story. That is, if the planet's going to grow, faster population growth, faster middle-class growth, faster consumption-class growth, it's going to be in the emerging markets, so I think they will be back.

Stipp: Bob Doll, chief equity Strategist at Nuveen, always good to get your take on the markets and the economy. Thanks for joining me today.

Doll: Thank you, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.