Bob Doll: Stocks Are Still Headed North, But Not Bond Prices and Commodities

Wednesday, 15 May 2013 08:24 AM

By John Morgan

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Veteran market commentator Bob Doll, chief equity strategist at Nuveen Asset Management, is predicting further gains for stocks, but a rockier road ahead for bonds and commodities.

In a note to clients, Doll acknowledged that while there are headwinds for equities, corporate accounting practices and government intervention are adequate to ensure more gains.

"We have been amazed by the market's ability to continue to rally in an environment in which sales growth has been anemic and earnings gains have been largely based on companies' abilities to manage margins and utilize financial engineering," he wrote.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

"While quantitative easing by the [Federal Reserve] and other central banks may eventually result in higher final goods prices, a more immediate result may be higher prices for risky financial assets, especially equities."

Doll said he believes the odds of a growth relapse is "relatively low" because of several positive economic factors, including a recent decline in initial jobless claims, an increase in loan demand and easing in lending standards and a delay in the next U.S. debt ceiling breach from July to possibly October.

Meanwhile, he said cyclical stocks are beginning to outperform as defensive stocks weaken. That kind of sector rotations is often viewed as a favorable indicator for investor confidence.

Specifically, Doll noted technology, energy, financials, industrials and materials are all beating the broad market, as consumer staples, utilities, healthcare and telecom fall behind.

"For equities, we believe the trend continues to be upward. For the bond markets, we expect a continued upward tilt in yields. Commodities are likely to continue to struggle until global economic activity is more robust," Doll predicted.

Barry Knapp, head of U.S. equity strategist at Barclays, had a slightly different take on the reason for the strength of the stock market.

The Financial Post reported Knapp told clients that share buybacks are largely responsible for Standard & Poor's 500 profits exceeding nominal gross domestic product in recent quarters. He estimated about 40 percent of the index's earnings growth in the past 12 months is due to repurchases that have hiked earnings growth by about 200 basis points.

"Buybacks, therefore, largely explain the resiliency of earnings growth despite the sharp deceleration in revenues," Knapp said, according to the Post.

Until corporate fundamentals deteriorate or the Fed tightens interest rate policy, Knapp expects shareholder-friendly activity to continue.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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