Bob Doll's 10 Predictions for 2015

2. Core Inflation Remains Contained; Wage Growth Increases

While there will likely be a drop in overall inflation, due to the decline in energy prices, if you strip out energy and food, you’ll see somewhat higher inflation, Doll said.

At the same time, there will be pressure to raise real wages. When the unemployment rates gets to about 6 percent, that’s usually the trigger for wage gains, he added.

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3. The Federal Reserve Raises Interest Rates, as Short-Term Rates Rise More than Long-Term Rates

By the end of this year, interest rates at every part of the Treasury curve will be higher than they were, but short rates will move up higher than long rates, Doll said.

The consensus has been that the Fed will raise rates near the middle of the year, and Doll agrees on that timeline.

“The decline in energy prices is on their radar screen, but I don’t think that’s enough for them to stop, unless there is financial dislocation, credit tightening and bankruptcy problems associated with that that would cause them to delay.”

What’s the rationale for raising rates? The economy is now growing above trend, and nominal growth—real growth plus inflation—is around 5 percent. In addition, rates started at zero.

“We got to zero because there was an emergency,” Doll said. “That emergency has passed, and as a result the Fed needs to get on with it, in my judgment.”

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6. U.S. Equities Enjoy Another Good Yet Volatile Year; Corporate Earnings and the U.S. Dollar Rise

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If you include last year, we’re currently in the fifth selling squall of the U.S. stock market, including a 7 percent drop last January, 4 percent slip in April, 5 percent correction in August, 10 percent drop in October, and a 5 percent decline recently.

“This is normal. Expect more of these kinds of selling squalls.”

Doll’s targeting 2200 for the S&P 500 Index, give or take, and that would take the stock market up 8 percent for the year.

How could a rise in rates affect the stock market? Historically, the early increases in interest rates are generally not bad news for the stock market, just marginally less good news. In the 12 months leading up to the first rate increase, stocks tend to do very well, and in the 12 months following, they generally do OK.

And over the last 100 years, stocks failed to go down in years ending in ‘5.’ In fact, gains on average have been very robust.

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10. The Republican and Democratic Presidential Nominations Remain Wide Open

Many believe Hillary Clinton will be the Democratic nominee for president, but Doll says it’s not going to be that simple. The primaries are often dominated by the fringes of the party, so it may bring out people like Elizabeth Warren or Ted Cruz.

That’s not to say that Clinton won’t get the nomination.

“I’m saying by the end of the year, I don’t think it’s going to be obvious who the nominees are on the other side of the aisle.”

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