Sentiment on the U.S. economy may be too high, leaving investors vulnerable to negative surprises on growth, according to Doll, the Chicago-based chief equity strategist and senior portfolio manager at Nuveen Asset Management LLC, which oversees about $230 billion. Equities and high-yield bonds may suffer in the short-term, with the chance of a deeper sell-off growing, he said. He remains bullish on equities longer-term.
“We remain constructive in the medium-and long-term toward risk assets, but are growing increasingly cautious about the short-term outlook,” Doll wrote in a letter to clients April 3. “More than politics, the economy probably presents a more probable roadblock for equities.”
Nuveen joins the likes of Thomas J. Lee, managing partner at Fundstrat Global Advisors LLC, who also expects a pullback in the S&P 500 Index. Even so, the eight-year bull run in U.S. stocks has continually confounded pessimists who’ve called for declines, and while Doll remains upbeat on the long-term, his shorter-term outlook is far from a given.
Strong signals on U.S. growth have helped drive a surge in stocks that’s added more than $3 trillion to the value of American equities in the past year. Gauges of U.S. consumer sentiment are at the highest levels in more than a decade. However, worse-than-forecast monthly auto sales on Monday offered a warning that Americans may have become more thrifty.
Minutes from the most recent Federal Reserve policy meeting, at which interest rates were raised, are due Wednesday, the next chance for investors to assess how the central bank is judging the economy’s potential to weather further rate hikes.
On politics, Doll pointed to a lack of progress on a budget agreement and some roadblocks on tax reform. Ultimately, he says, a tax bill will be passed, though it may be more limited in scope than expected.
Key to Doll’s thesis for short-term declines in stocks is an overoptimistic stance among investors on the economy. Still, he acknowledges it’s not clear what may provide the impulse for this dent to economic data.
“We are not expecting a significant economic slowdown, but the nearly non-stop pace of positive economic data is unlikely to continue,” he said. “At some point, a setback will likely be triggered by a manufacturing decline, soft oil prices, weakening data from China or some other factor, which could spark a risk-off phase.”