Thanks to wage increases and energy savings, the consumer should drive the economy to good, but not great, growth in the second half, says Nuveen's Bob Doll.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Bob Doll. He is the chief equity strategist at Nuveen Asset Management. We're going to look at the state of the U.S. economy, what the Federal Reserve might do, and what impact that has on stocks.
Bob, thanks for joining me.
Bob Doll: Thank you, Jeremy.
Glaser: Let's start with the state of U.S. economy. We've had some data recently that seems to show the spring thaw again. Is that sustainable or is this just a bounceback from a bad first quarter?
Doll: Our guess is that it is sustainable. We were--like many--surprised how much the Dow was down, so the recovery is not a surprise. I think the sustenance will come from the U.S. consumer on the back of better job news, finally some wage-rate increases, and the fact that they haven't spent much of the energy savings. I think the consumer will do a bit better in the second half and that will spur the economy to good, but not great, growth.
Glaser: So, if we're looking at that good, but not great, growth, what does that mean for the Federal Reserve? Are they going to feel pressure to raise rates maybe in September?
Doll: I don't know if they will feel the pressure; I think they will feel entitled. The Fed has been waiting, waiting, waiting, waiting. I think they are anxious to get going because, remember, the starting point is zero. It's not as if we have low rates and we need to get punitive. We have zero rates and we need to normalize. That's my view and, therefore, I think [rates] will most likely go up in September.
Glaser: If they do raise rates, what's the short-term impact of that? We saw with the "taper tantrum" when they talked about just reducing the size of bond purchases that that had huge global impacts. Would you expect something like that to happen again this year or is this move priced in?
Doll: Of course, we've seen a bit of one already in the German bund moving from essentially 0% to 1% and the U.S. 10-year Treasury moving from the high [1% range to the mid-2% range] in just a matter of a few months. So, we've seen a bit of it. I think among the reasons we're not reacting the same way is because stocks didn't fall 7% as they did last time. So, I think we've had a bit of a tantrum already.
<TRANSCRIPT>
Glaser: When you look at the U.S. equity market then, in the past you've advocated for overweighting equities generally. Is that still your general case? Do you think that people should own lots of equities right now?
Doll: I do--particularly in relation to other plain-vanilla asset classes like cash and bonds. I think the trick for the equity market goes back to your comments and questions on the economy: Do we have better earnings in the second half? First-half earnings were disappointing because of oil and the dollar. In the second half, my guess is we will get some positive surprises on the back of the good things we talked about with the consumer. My view is that's a necessary condition for stocks to have a decent second half.
Glaser: So, when you look at valuations right now, do you think they are supported by the earnings?
Doll: I do. A massive rise in interest rates will mean that P/Es will have to come down. But at the current level of rates and inflation, I think valuations are full but fair.
Glaser: You mentioned the stronger dollar earlier. What impact is that having on corporate earnings? Are we going to keep hearing about that in [the second quarter]--about earnings really being hurt by that strong dollar?
Doll: I do think that will be the case, sadly. I think we'll have was some residual negative effects from the decline in energy prices for energy and related companies, but I also think that the dollar strength, year over year--which is still noticeable--will impact results in a negative way. So, I think we'll have a sloppy second quarter. It's the second half where I think we will get better news.
Glaser: So, what could derail this thesis? You mentioned rising interest rates or things rising much faster than you expected. What else could pose a problem to equities being the place to be?
Doll: Inflation. We have started to see some wage-rate inflation poke its head. Again, when the Fed funds are at zero and they are waiting for 2% inflation, suppose inflation goes to 2.5% instead of 2% or heads toward 3%--oh, my goodness, the Fed is going to have to play a lot of catch-up. I don't think it's a high probability, but it's certainly something to worry about. Of course, the other side of the coin goes back to your very first question: Suppose this is just a spring thaw and has no legs to it. We kind of go back into the doldrums, earnings aren't so good, and we kind of meander some more. Stocks won't like that environment either. It's this in-between, the "Goldilocks"--not too hot, not too cold--that's perfect for stocks.
Glaser: How about some of these geopolitical issues? It seems like Greece is in renewed headlines every week. Is that a real issue or is that just noise?
Doll: I think it's noise, but that's a little cavalier. If Greece were to disrupt or interrupt the euro by not being there anymore, that would be a problem certainly for Europe and [could cause the rest of the world to] catch a cold. My guess is that at the end of the day--like the other times that Greece has been in the crosshairs--Germany will find a big enough check to write to keep Greece in euro because Greece in the euro is worth more to Germany than Greece out of it. So, my guess is that that political answer will solve Greece but not without some bumps in the meantime.
Glaser: Bob, we always appreciate your insights on the market.
Doll: Thank you, Jeremy.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.
