It’s been a great 10 years to invest in US large-cap stocks, since they’ve dominated throughout the ongoing bull market.
Bob Doll — chief equity strategist at $1 trillion Nuveen Asset Management and a senior portfolio manager overseeing $2.3 billion in assets — is tasked with evaluating that universe of stocks and has watched their sustained rise over the past decade. But he says the market is heading somewhere very different today, and the years ahead could be a a lot different.
“My guess is, next five years, leadership is going to be a very elusive,” he told Business Insider in a recent interview. “It’s very unlikely to be as uni-dimensional in the next five to 10 years as it has been in the last five to 10 years.”
Unlike the past decade — which was market by a steady global recovery, rapid technological innovation, and consistently low interest rates — Doll said it’s difficult to identify trends that make any particular industry, region, or investing style look like clear winners.
In its place, he instead sees a churning market where leadership flits from one style or area to another, limiting the performance of most assets.
“The returns on stocks, bonds, and cash in the next five years are going to be lower than long-term returns,” Doll said.
In other words, Doll is all-in on the theory that selectivity is going to be much more important in the years ahead. He laid out four themes that he’s using to find successful stocks in that more difficult environment.
The economic cycle
Doll said he doesn’t see any signs a recession will arrive before 2021, and he thinks investors who are in a rush to position themselves defensively ahead of that eventual downturn are making a double mistake. They’re missing out on actual growth, and overvaluing defensive stocks in the process.
“I want to own those companies that do benefit from the cycle because the cycle is not over, and I want to be underweight (or) short those ‘recession proof’ stocks that have gotten way ahead of themselves,” he said.
While Doll says he’s not overwhelmingly positive on the US economy today, he’s still betting on the strength of its consumer segment, and the trends in spending and entertainment that have developed over the past two decades.
Free cash flow
Doll explained that if he had to decide whether to invest in a stock based on just one piece of data, he would want to know the company’s cash flow.
“I love a company that has massive free cash flow, is trying to reinvest in their business for growth, but still has more money left over where they can increase the dividend and buy back some stock,” he said. “There aren’t enough of those.”
Pricing power
Doll noted that wage growth in the US has picked up slightly, putting corporate profits under some pressure just at the same time revenue growth is slowing. He said he’s looking for companies that are either boosting their sales or have the ability to increase their prices, describing that as an important edge as growth declines.
“You’ve got differentiate yourself in a world that is slowing,” he said. He said consumer discretionary companies, slower-growing tech companies, and health care services companies all have promise in that area.
Doll added that the health care service sector offers upside because investors have overestimated the political risk to most of those companies.
“The chance of Medicare for All, which has damaged the health care services companies, is close to zero” in 2020, he said. Doll described it as a pretty remote possibility even if Democrats end up with control of the presidency and both houses of Congress.
Stay US-focused
Doll said threats to multinational companies are rising. Populism remains politically strong and countries simply aren’t using it for a source of growth as they did in decades past.
“Because trade as a percent of GDP for virtually very country in the world is shrinking, suddenly domestic growth becomes more and more important,” he said.
All of that makes the US more appealing, both because of its growth potential and lesser vulnerability to catastrophic trade disruptions.
“We are the most isolated economy on the planet,” he said. “Imports and exports mean less for us than any other country.”
