Nuveen’s Bob Doll warns on short-term ‘blue wave’ euphoria in markets

Investors cheering the “blue wave” in the US are focused on the short-term benefits but ignoring the longer-term implications.

Nuveen expects stock prices to rise again this year, but not as much as earnings. Picture: AFP

Investors cheering the “blue wave” in the US are focused on the short-term benefits but ignoring the longer-term implications, according to US fund manager Nuveen’s chief equity strategist Bob Doll.

While US stocks “have a lot going for them in 2021” as the economy and corporate earnings recover from the COVID-19 pandemic, the market was not yet paying enough attention to the prospect of more regulation and higher taxes after Democrats won the balance of the power in the US Senate, Mr Doll told The Australian.

“The market is saying, ‘Oh, we’re going to get more stimulus; this is great news for the economy’. And that’s partly why 10-year Treasury yields backed up by 15 basis points just this week.

“So short term there’s smiles, but longer term I’m not so sure. The market is really just looking at the short term at the moment,” he said.

US stocks in the first week of the year pushed to fresh record highs as investors looked through the recent political tensions and homed in on the prospect of further stimulus.

The razor-thin majority in Congress, with vice president-elect Kamala Harris holding a tie-breaking vote in the Senate, was likely to deliver a “light blue wave” rather than the “dark blue” markets were concerned about in the run-up to the presidential election, Mr Doll predicted.

This could temper the Democrats’ ability to push through more aggressive policies.

“Regulatory possibilities are a little higher as a result of (the Democrats winning) 50 seats (in the Senate). That’s good news for alternative energy but less good news for traditional oil and gas,” Mr Doll said.

It also left more of a question around further regulation in the financial sector, he added.

While he expected “a lot of noise” around tighter regulation of the technology sector, Mr Doll said it was hard to say whether legislation to back it up would materialise.

Bob Doll, chief equity strategist with US fund manager Nuveen. Picture: Bloomberg

However, tech companies could be hit by higher taxes.

“My view is for corporations in the US that pay low or no taxes, there’s a good chance that there’ll be some minimum rate of taxation put in, and that encompasses a lot of tech companies,” he warned.

The last days of the Trump presidency, he said, would be filled with political noise around the 25th amendment and his possible impeachment.

Democrats are expected to introduce formal articles of impeachment against President Trump in the House of Representatives on Monday.

“Every effort will be made by the powers that be — meaning Vice President Pence and the press secretary — to try to keep Trump quiet in the corner the best they can, and just ride out these last few days,” Mr Doll said.

Any thoughts President Trump had of running again in 2024, or getting the Republican nomination, were diminished following the storming of the US Capitol, he added.

Outlining some of his top 10 predictions for 2021, Mr Doll said he expected real US GDP to ­increase at its fastest pace in 20 years as the economy rebounded from the coronavirus crisis.

Corporate earnings would also “have a great year”, but equity market returns would be more muted, with stocks having “borrowed” some of 2021’s gains.

“We enter 2021 with investor optimism running high. The reopening of the economy combined with increasing consumer and business confidence should create a positive backdrop for equity markets in 2021, but the key question is how much of this good news has already been priced into the markets.”

Amid the shift from an earnings-driven market, Mr Doll said stock prices would lift again this year, but not as much as earnings.

“Because the economy and earnings are likely to be very strong this year, we think interest rates and inflation will move up a bit, enough to talk about. And that will put a bit of a lid or some pressure on PE ratios, especially for very high defensive growth PE stocks.”

But the equity market was still the place to be, he said. “Equities will still lead the way. We think stocks will beat cash and cash will beat bonds. Stocks will be up a modest amount (over the year), while cash will return a little more than zero. And bonds will have minus signs in front of them.”