Nuveen Asset Management, the multi-asset class affiliate of Nuveen Investments, today announced Senior Portfolio Manager and Chief Equity Strategist Robert C. Doll has released his Ten Predictions 2016. For more than 25 years, Doll’s widely followed annual predictions have taken a deep and thorough look at key factors he believes are positioned to meaningfully shape the economy and markets for the coming year. They further lay the foundation for the noteworthy portfolios he and his team run in the Nuveen Large Cap Equity Series. Doll’s Ten Predictions have long served as thoughtful guides to issues investors should consider as they work with their financial advisors to build strong long-term investment portfolios.

A Look Back at 2015

2015 proved to be a mostly unrewarding year for investors and one that was filled with anxiety and uncertainty. Most asset classes struggled and a number of macro shocks dominated the financial headlines. From another Greece-induced sovereign debt crisis, a sharper-than-expected slowdown in China and the long-awaited Fed lift-off, to the late-year meltdown in commodity prices, continued terrorism threats and a bizarre U.S. political and election backdrop, it is understandable that investors may find themselves rightly asking, “What just happened here?”

While all of these issues and events presented headwinds for stocks, the fundamental issue of weak corporate earnings was most responsible for equities’ lackluster progress. The combination of a strong U.S. dollar and falling oil prices acted as a drag on revenues and earnings. It wasn’t surprising that energy, materials and some industrial companies faced problems. What was somewhat surprising, however, was that the benefits of lower oil prices only marginally lifted earnings from consumer-oriented and other “energy-using” segments of the market.

As Mr. Doll has often stated, this remains the least-believed economic recovery and bull market of our careers, if not our lifetimes. The S&P 500 Index has tripled in value since the end of the Great Recession and yet emotions of fear and uncertainty continue to haunt investors. These emotions have been fueled by the mediocrity of the economic cycle, multiple on-again, off-again skirmishes of all kinds both domestically and internationally, and the changed position of the United States relative to the rest of the world. Despite the negativity and uncertainty of 2015, which proved in abundance, the equity markets managed to eke out modest gains with several other bright notes to the year. The U.S. economy continues to improve and has witnessed (1) healing in the housing and banking sectors, (2) a return to all-time-high household net worth, (3) a refinanced corporate and household sector, (4) a dramatic decline in unemployment and (5) a massive decline in the federal budget deficit.

Set against this backdrop, Doll presents his Ten Predictions 2016, followed by his 2015 Scorecard, and also offers a guide for investors for the year ahead.

2016 TEN PREDICTIONS

  1. U.S. real GDP remains below 3% and nominal GDP below 5% for an unprecedented tenth year in a row.
    Mediocre economic growth and relatively low inflation have been the hallmark of the current expansion. We don’t expect that will change in 2016. Never before in U.S. history has real growth stayed below 3% and nominal growth below 5% for 10 years in a row. Yet, we think this will happen in 2016. We expect growth will continue to be modest. While inflation may tick higher, it should do so slowly. From a global perspective, the U.K. and the eurozone should be positive contributors while Japan, China, and commodity-based economies will likely create a drag on growth.
  2. U.S. Treasury rates rise for a second year, but high yield spreads fall.
    Treasury yields have been rising unevenly for several years. Many forget (or missed) the fact that 10-year Treasury yields bottomed at 1.43% in July 2012. Since then, rates have meandered irregularly higher as economic growth advanced and the Fed continued to make slow moves toward normalization. High yield spreads expanded near the end of 2015, especially in energy and related areas. We think decent economic growth and low defaults will cause spreads to narrow in 2016.
  3. S&P 500 earnings make limited headway as consumer spending advances are partially offset by oil, the dollar and wage rates.
    The most significant headwind for equities in 2015 was constant pressure on earnings. We don’t expect the dollar to climb as significantly as it did in 2015, and believe oil prices are bottoming. As such, these twin headwinds should lessen. Upward pressure on wages, however, could emerge as a new problem for earnings. Higher levels of consumer spending should provide modest revenue growth, and ongoing corporate buybacks should allow some degree of earnings growth. A notable risk to our view is potential pressure on corporate profit margins, which should be watched carefully.
  4. For the first time in almost 40 years, U.S. equities experience a single-digit percentage change for the second year in a row.
    Although the average long-term annual rate of return for equities is in the high single digits, markets rarely deliver single-digit returns. And it is especially rare for equities to do so in consecutive years. In fact, this last happened in the United States in 1977 and 1978. We think a large upside or a large downside move (meaning a double-digit percentage gain or loss) is unlikely given the crosscurrents. In particular, while fundamentals should improve somewhat in 2016, the Fed will be less friendly than in recent years. Similarly, arguments exist on both sides of the valuation and sentiment discussions. In our view, the bull market will likely continue, but the “easy” money has already been made. Earnings growth in 2016 is likely to be the key variable to stock market returns.
  5. Stocks outperform bonds for the fifth consecutive year.
    Our best guess is that equities will be up modestly and the broad bond market will lag, weighed down by rising Treasury yields. Historically, equity prices have risen in the twelve months following the first Fed rate hike. In contrast, we think many areas of the bond market may struggle in the face of rising rates. Accordingly, we favor an overweight in equities versus bonds, and would be especially wary of U.S. Treasuries.
  6. Non-U.S. equities outperform domestic equities, while non-U.S. fixed income outperforms domestic fixed income.
    Generally speaking, U.S. equities and fixed income have outperformed their non-U.S. counterparts over the last few years. Assuming global growth improves, the United States will likely surrender its years-long market leadership. Today, we think the United States is growing more robustly than the rest of the world, but we may be near the peak of U.S./global divergence. Additionally, with the Fed raising rates and many other regions remaining in easing mode, U.S. fixed income may struggle on a relative basis. On a related note, we believe the mantle for fastest growing emerging country has been passed from China to India.
  7. Information technology, financials and telecommunication services outperform energy, materials and utilities.
    As we saw in 2015, we think free cash flow and unit growth will be keys to success in 2016. From a sector standpoint, we favor technology, (a sector with growth and value, domestic and international, and cyclical and defensive choices), financials (which should benefit from rising interest rates) and telecommunications services (a cheap, defensive sector). We remain cautious on the deeper cyclical areas, and low energy prices should weigh on the energy and materials sectors. As for utilities, this proxy for the bond market will likely struggle as rates rise. We also have a modest preference for large caps over small caps and growth styles over value (our style preferences may shift if global economic growth broadens.)
  8. Geopolitics, terrorism and cyberattacks continue to haunt investors but have little market impact.
    Unsettled and skeptical investor attitudes are partially fed by the increase in terrorism and cyberattacks, as well as a growing list of geopolitical hot spots. Sadly, these issues will likely remain in 2016. The human cost of these issues is heartbreaking, but experience shows that any market impacts will likely be small and temporary. Cyberterrorism has unfortunately become a way of life and will likely only increase as technology advances.
  9. The federal budget deficit rises in dollars and as a percentage of GDP for the first time in seven years.
    The federal budget deficit shrank by 70% from its 2009 peak by the end of 2015. This drop was as a result of the sequestration following earlier budget impasses, as well as improved tax receipts from a growing economy. With the recently passed budget bill, the era of fiscal austerity is over. Rising deficits and debt present long-term issues, but there is a silver lining: Increased spending means the federal government should contribute positively to economic growth after years of being a drag.
  10. Republicans retain the House and the Senate and capture the White House.
    At this point, the outcome of the Presidency, the Senate, and possibly even the House, is in question. Conventional wisdom (and poll numbers) suggests Democrats will retain the White House and have a good shot of capturing the Senate. Nevertheless, we are going out on a limb (perhaps foolishly) and arguing for a Republican sweep. The biggest question today is whether the Republicans can unify around an electable candidate.

BOB DOLL SCORES OF HIS 2015 PREDICTIONS

  1. U.S. GDP grows 3% for the first time since 2005.
    Wrong
  2. Core inflation remains contained, but wage growth begins to increase.
    Correct
  3. The Federal Reserve raises interest rates, as short-term rates rise more than long-term rates.
    Correct
  4. The European Central Bank institutes a large-scale quantitative easing program.
    Correct
  5. The U.S. contributes more to global GDP growth than China for the first time since 2006.
    Correct
  6. U.S. equities enjoy another good yet volatile year, as corporate earnings and the U.S. dollar rise.
    Half-Correct
  7. The technology, health care and telecom sectors outperform utilities, energy and materials.
    Correct
  8. Oil prices fall further before ending the year higher than where they began.
    Half-Correct
  9. U.S. equity mutual funds show their first significant inflows since 2004.
    Wrong
  10. The Republican and Democratic presidential nominations remain wide open.
    Correct

Score: 7.0 out of 10

Outlook 2016: Investors May Struggle, but Opportunities Exist

In many ways, 2016 should look like 2015. We believe the United States remains in a very long (if slow) economic expansion that should produce choppy returns in most asset classes. Global growth was uneven in 2015, and a major variable will be whether global growth slows or regains traction. Our bet is on the latter. The United States should continue to enjoy an expansion and we do not expect modest rate hikes will derail the economy. Continued policy easing in Europe should help that region experience a rebound. On the negative side, China is likely to slow further and commodity-dependent emerging economies may struggle. We expect the Chinese economy to stabilize, however, and also believe oil is in the midst of a bottoming process, which should prevent significant commodity-related damage. On balance, we believe the global economy should accelerate modestly in the coming year.

Equity markets have proven to be resilient in the face of risks, but eventually earnings growth will need to pick up for prices to advance. As long as global growth accelerates, we think earnings should recover. And if profits can expand even modestly, valuations are unlikely to be pressured. The bull market is maturing, which means the pace of gains is likely to slow. But we still expect equities will be able to outpace bonds, which may be hurt by rising yields.

Equity market leadership is likely to shift from secular, stable growth areas toward sectors primed to benefit from improving economic growth and rising bond yields. At the same time, we think it is reasonable to expect non-U.S. equities to make headway as global growth accelerates and as fears associated with Greece and China recede. The key risks to our outlook include slowing growth in China, commodity pressures, policy errors by central banks, widening credit spreads and unpredictable geopolitical developments.

Overall, we expect 2016 will present difficulties for investors, but there are reasons for optimism. If things go right and global economic growth broadens and improves, that should allow corporate revenues and earnings to strengthen. Such a backdrop, combined with still-low inflation and still-easy monetary policy, should be enough for equities to make further gains. We would encourage investors to continue holding overweight positions in equities and expect 2016 will be another year in which selectivity is paramount to investors’ success.

Key Themes for Investors: Matching Goals to Investments

Early in the year is often an ideal time for investors to review investment goals and their adjust asset allocation decisions with a financial advisor. Bob Doll and the team at Nuveen Asset Management suggest focusing on the following areas:

Maintain overweight positions in equities, but be selective: We think equity markets will struggle in 2016, but should still outperform bonds and cash. Gains are likely to be narrower and more focused on specific sectors and companies, so remaining selective will be crucial. We prefer the technology, financials and telecommunications services sectors and, for now, have a modest preference for large caps over small and growth over value.

Watch for shifts in equity market leadership: As the U.S. economy continues to grow and as world economy improves and broadens, we are becoming biased toward companies that can benefit from an improving economy and rising bond yields. Additionally, we think the long-term trend of U.S. equity outperformance may start to come to an end and expect non-U.S. equities may begin to outperform (in particular, we favor European and Japanese multinationals).

Selectivity also matters in fixed income: With low yields and the prospect of modestly rising rates, fixed income investing has become more challenging. Investors may want to rely on active managers with the flexibility to respond to market changes and the investment acumen to remain ahead of their peers in uncertain markets. We also think focusing on credit sectors (including high yield bonds) over government-related sectors makes sense, and we continue to have a favorable view toward municipal bonds.

Alternatives can play multiple portfolio roles: Alternative assets, including real assets, real estate and other investments, can introduce diversified sources of risk, return and/or income to a portfolio. Alternative strategies such as equity long/short or market neutral could also be worth considering since they have historically had low correlations to long-only, benchmark-oriented investments.

Characteristics we look for when evaluating companies:

  • Free cash flow can provide flexibility to raise dividends, buy back shares and reinvest in the business
  • Companies with the ability to generate unit growth may be advantaged over those that lack pricing power
  • Economic sensitivity and above-average secular growth may help insulate against market fluctuations

For more detailed information on Bob Doll’s 2016 Ten Predictions including full commentary and a point-by-point examination of his 2013 predictions, visit Ten Predictions 2016. To learn more about Nuveen Asset Management’s Large Cap Equity Series managed by Bob Doll, visitLarge Cap Equity Series. Financial advisors interested in receiving Doll’s weekly commentary and special market reports can subscribe via the following link: Bob Doll Weekly Commentary. Follow Bob Doll on Twitter via https://twitter.com/BobDollNuveen.

About Nuveen Asset Management

Nuveen Investments provides high-quality investment services designed to help secure the long-term goals of institutional and individual investors as well as the consultants and financial advisors who serve them. Nuveen Investments markets a wide range of specialized investment solutions which provide investors access to capabilities of its high-quality boutique investment affiliates—Nuveen Asset Management, LLC, Symphony Asset Management LLC, NWQ Investment Management Company, LLC, Santa Barbara Asset Management, LLC, Tradewinds Global Investors, LLC, Winslow Capital Management, LLC and Gresham Investment Management LLC, all of which are registered investment advisers and independent investment subsidiaries of Nuveen Investments, Inc. Nuveen Investments operates as a separate subsidiary within TIAA-CREF, which is a leading provider of retirement and financial services in the academic, research, medical and cultural fields. In total, Nuveen Investments managed approximately $220 billion as of September 30, 2015. For more information, please visit the Nuveen Investments website at www.nuveen.com.

The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-investment-grade bonds involve heightened credit risk, liquidity risk, and potential for default. Foreign investing involves additional risks, including currency fluctuation, political and economic instability, lack of liquidity, and differing legal and accounting standards. These risks are magnified in emerging markets. Past performance is no guarantee of future results.

12807-INV-O-01/18