2017 Mid-Year Market Outlook from Bob Doll

Inflationary pressures remain low, and the latest Federal Reserve Beige Book showed most of the 12 Fed districts reporting moderate economic expansion, according to Bob Doll, chief equity strategist at Nuveen Asset Management.

Doll recently released a mid-year update to his recurring “10 Predictions” research series. Now that more than half of 2017 has elapsed, Doll still expects slow growth to continue and believes U.S. gross domestic product growth is likely to increase to only 2.0% this year.

“In 2018, we expect growth will climb to near 2.5% if fiscal stimulus measures actually pass,” he says. “Beyond that timeframe, however, we may see additional signs of economic stress.”

Important for the retirement planning market, Doll observes the Federal Reserve has “already raised rates twice this year, and is firmly in hiking mode.”

“Despite persistent inflation weakness, the central bank also indicated that one more increase was likely later this year,” he warns. “The Fed also laid out a plan to slowly normalize its balance sheet. We expect these moves will put upward pressure on bond yields. But with rates still near historical lows, slowing rising rates are unlikely to derail equity markets.”

Doll suggests that one of the “biggest U.S. economic wildcards is obviously the political backdrop.”

“U.S. political risks are escalating and a comprehensive tax reform bill seems unlikely in 2017,” he argues. “The Trump administration has yet to produce specifics about its tax goals and health care reform is taking much longer than anticipated. At the same time, ongoing investigations into the White House are, at a minimum, creating serious distractions. Investors still expect a tax bill, but the odds are diminishing of anything comprehensive being passed this year.”

Overall Doll still expects “growth-friendly fiscal stimulus measures” to be enacted in the coming months, noting the “best-case scenario would be for fiscal policy to become easier just as the tailwinds from easier monetary policy are fading.”

Interestingly, Doll points out that U.S. equity markets have experienced “notable leadership shifts” over the past 18 months, and he expect the gyrations to continue.

“In the first half of 2016, growth stocks and defensive sectors led the way as investors worried about recession and deflation risks,” he says. “This changed dramatically in the second half of 2016 as growth firmed and sentiment improved, resulting in a strong surge for value and cyclical areas of the market. So far, 2017 has looked more like the first half of last year. In the closing weeks of the quarter, however, markets began experiencing a rotation out of growth areas (marked most notably by some sharp sell-offs in technology).”

Doll predicts this rotation will continue and that a “broader leadership change from growth to value styles and from defensive toward cyclical sectors.”

The full analysis is available for download here.