“The Federal Reserve has been the best friend of the equity market and is turning slightly less friendly as time goes by,” he continued. Fears of higher interest rates have crimped enthusiasm for equities. He argues, however, that interest rate hikes affect equities differently depending on what other metrics are. According to JP Morgan stats he used, the S&P had bigger gains during 12 month periods after an interest rate hike if interest rates were already low, inflation was low and oil was declining (and all those things are happening now).
“I think the decline in oil prices is fantastic news long term for the U.S. consumer and almost every other consumer,” he said. “Lower oil prices means I have more left over to do whatever else I want to do with it.” Of course, that’s no succor to people who are actually in the oil biz. Some states, countries and companies will suffer. And lower oil prices could also spur deflation. Furthermore, the way oil is rapidly plunging (the price of Brent crude oil has been cut in half since the summer, and now hovers below $50 a barrel) also plays a role, he says, because quick drops like tat cause other dislocations and shake confidence.
What these factors mean for asset allocation, Doll says, is that some combination of technology, health care and telecom will outperform utilities, energy and materials.
“Our preference is for cyclicals that are not commodity dependent, so-called mid-cycle cyclicals like technology,” he says.
Broadening the themes, “We prefer mid- to deep cyclicals, prefer strong free-cash-flow to cash-consuming companies, prefer companies that primarily get their earnings from the U.S. rather than from outside the U.S. Prefer energy users to energy producers. I’d rather own an airline than an [exploration and production] company. Prefer big cap to small cap, though that’s a modest one, and a modest preference for growth over value styles.”
Overall he says the firm is overweight equities, neutral on commodities and underweight in cash and bonds. "Stock selection will be key, bond selection will be more key to win." The firm also weights the U.S. more heavily. Overseas, he would overweight multinational companies residing in Europe and Japan and underweight the domestics. The firm is neutral on emerging markets. A well diversified portfolio could win an investor an average return of 5% to 6% return. More stocks (with more risks) will get bigger returns and a bumpier ride.
The market is mature, he says, which means slower rates of gains for equities and more volatility. "But we are still in a bull market."
The 10 Predictions for 2015
1. U.S. GDP grows 3% for the first time since 2005.
2. Core inflation remains contained, but wage growth begins to increase.