PANC 2012: Keynote Presentation–Bob Doll

Even though the U.S. economy will continue to “muddle through” as it grapples with multiple headwinds that trace back to massive debt deleveraging, “corporate America is delivering the goods, i.e., strong earnings,” Doll told the audience of 450 advisers gathered at the JW Marriott Orlando Grande Lakes. Doll also said he appears to have been right about at least eight of the 10 predictions for 2012 he made at the beginning of the year.

Advisers can form their “macro perspective for portfolio construction, investment management and asset allocation” based on one key trend that will dominate the markets and the economy for the foreseeable future, Doll said: The post credit-bust world. “As it takes years for the bubble to build, it takes years to repair—some of it voluntary, some of it forced,” Doll continued.

“Corporate America ex-financials started deleveraging before the bubble. Companies are in the best condition since the 1950s,” Doll said. “After three years of deleveraging, consumers are making great progress on interest expense as a percentage of income. Let’s hope the government starts deleveraging someday.”

Amid the ongoing economic uncertainty and talk of a “fiscal cliff” in the U.S., globally, central banks’ monetary policy is creating a “sweet spot” for stocks, Doll maintained. “There’s a monetary party going on in this planet,” he said. “Central banks will do whatever it takes—England, China, Japan, Brazil and the European Central Bank are all trying to reflate. That is when stock markets do their best, and even when their economies get there, their markets all continue to do fine. This is lasting several years, supporting fundamentals for economic growth and earnings growth. Even with sentiment for cash and fixed income versus stocks at the extremes—this is the sweet spot.”

Doll added, “I believe yields and the U.S. growth rate will continue to be on the plus side. These have kept me invested in risk and equities. Get your underweight-equity clients to dollar-cost average back into stocks.” For 2012, returns could be in the double-digits, Doll said. For the next 10 years, Doll predicts “an 8% equity world, with 6% coming from earnings and 2% from current yield.” As for all of the talk on the fiscal cliff of 2012, “There’s complacency on the U.S.’s ability” to fix this problem, he added.

With regards to Doll’s annual 10 predictions for the coming year, he said he appears to be on track for all of the following points for 2012 except, perhaps, not yet being able to pinpoint when interest rates will rise (Prediction No. 5) or to accurately predict the outcome of the 2012 Presidential election (Prediction No. 8):

1. European debt crisis begins to ease, even as Europe experiences a recession.
2. The U.S. economy continues to muddle through yet again.
3. Despite slowing growth, China and India contribute more than half the world’s economic growth.
4. U.S. earnings grow modestly but fail to exceed estimates for the first time since the Great Recession.
5. Treasury rates rise, and quality spreads fall. “I’m half right, half wrong on this one, since Treasury rates have not risen, and while I have predicted they would for the past seven quarters, I now haven’t a clue when interest rates will rise,” Doll admitted.
6. U.S. equities experience a double-digit return as multiples rise modestly for the first time since the Great Recession.
7. U.S. stocks outperform non-U.S. stocks for the third year in a row. “We have plenty of problems but they have more problems,” Doll said. “Corporate America is delivering the goods, doing a magnificent job of delivering earnings and free cash flow yields. Corporate America cleaned up its act. You see that in the income statements and balance sheets.”
8. Dividends and buybacks hit a record high.
9. Health care and energy outperform utilities and financials. “Sectors remain cyclical in this risk-on/risk-off environment,” Doll said.
10. “Republicans retain the House and capture the Senate,” Doll predicted. “I flipped a coin for the presidency.” Doll noted that President Barack Obama is facing a decline in his “strong approval” rating of 44% at the time of his inauguration, which had fallen to 21% in December 2011. “There’s also unemployment,” Doll added. Regardless of whether Obama or Republican candidate Mitt Romney is elected, Doll has faith the government will not hit a “brick wall over the fiscal cliff, and strike a deal.”

Until June 2012, Doll spent more than three decades with BlackRock, most recently as chief equity strategist for fundamental equities. Doll told the PANC audience he is now serving as a senior analyst with the world’s largest asset manager as he decides how to spend the next 10 to 20 years of his career.