My expertise is in personal financial planning and investing, not economics. Few investment advisors are formally trained economists. Most of us know just enough about economics to be dangerous.
But at a recent conference I had the chance to listen to someone who does have a clue. Bob Doll, senior portfolio manager at Nuveen Asset Management, often discusses investing and the economy on media outlets like Bloomberg TV.
Doll says that we are in a period called “more muddle through.” Basically, he doesn’t think the markets are going to go either up or down in a sustained manner. That doesn’t mean we should expect calm and quiet stock markets. The 0% return for the first quarter of 2016 included a record-setting double digit drop followed by a double digit recovery.
Doll reviewed the first 45 days of the year to attempt to explain why in January we had the steepest drop on record in the US market. The reasons he cited were: fear over a recession, fear that oil prices would continue to fall, fear China’s slowdown was heading them into a black hole, fear the Federal Reserve would have five interest rate hikes, and fear over the US elections.
Then he gave the reasons for the market’s sharp rally: investors decided there wouldn’t be a recession after all, that oil prices probably wouldn’t fall to $0 and eventually rise, that even with its slowdown China was still the world’s second-fastest growing economy, that the Fed would probably only raise rates once or twice, and that whoever is the next president will be a disaster anyway.
Doll explained that investors often get “fear funk,” a tendency to believe any negative news they hear, without regard to the facts. For example, he noted most politicians are telling us how terrible things are in America. Yet we have added more jobs in the past five years than at any time in history, 89% of them full time. This is one reason he feels the chance of a recession is zero this year. Others are strong job growth, the beginning of wage growth, the fact that individuals are paying off debt and increasing assets, and the economy enjoying the benefit of low oil prices.
Everything isn’t all positive, however. Doll warned that the national deficit will rise for several years. However, the national debt is rising slower than GDP so the debt-to-GDP ratio is actually falling, which is a good thing. His biggest worry is that the US has the world’s highest marginal tax rate on businesses and the highest taxation on repatriated earnings. He said this more than anything will serve as a real restraint to a vibrant economy.
When asked where he thought the stock market would end the year, Doll reiterated he really doesn’t know. It usually does well in election years, except for falling an average of 4% when a president has been in office eight years. Still, if he had to guess he thinks stocks will reverse this trend and be up around 7%.
He added that over the long term he expects a diversified portfolio of 60% stocks, commodities and alternatives and 40% bonds to return 6%, with inflation averaging 3-4%, giving real returns of 2-3%. This is completely in line with my historical estimates.
Even though most investment advisors, myself included, aren’t economists, we do understand one important thing: the strongest safeguard against economic ups and downs is diversified investing focused on the long term.