Nuveen Asset Management’s Bob Doll said the tech sell-off was long overdue and may not be over, but it could be just what the stock market needs to send it higher.
“It’s not the end of the tech story by any means,” said Doll, who is the firm’s chief equity strategist. He said sell-offs like the one that took the Nasdaq down 2.3 percent over the last two sessions are not uncommon.
“We had one in November. We had one last February. It’s amazing how wings flap and people get excited. For the market to move noticeably higher, it needed more participation. It started to get narrow. Financials are doing a bit better. Energy is doing a bit better. This could breathe some new life into the market. We’ll be watching,” he said in a telephone interview.
As the Federal Reserve starts its two-day meeting Tuesday, Doll said he expects the Fed to hike interest rates. But he has doubts about whether there will be a third rate increase this year. While the central bank forecasts two more and many economists agree, the market has priced in just about 50-50 odds for another interest rate rise after Wednesday’s expected hike.
“I think that’s going to be the most interesting part of the conversation. With economic growth not as robust as it might have been three months ago and inflation not rising like it was three months ago, there’s a lot of great questions they have to answer. ‘You’re really going to do it again this year?’ I think it’s 50-50,” said Doll. “Maybe there will be more clarity one way or the other that helps us move that 50 percent.”
The Fed is also expected to discuss how it hopes to begin reducing its $4.5 trillion balance sheet. He does not expect that to be a negative for stocks.
“The Fed’s really important in the early stages of a cycle. At this point, they’re going to follow the curve and normalize rates,” Doll said. “I don’t think they’ll get ahead of the curve.” If the Fed runs into trouble as it winds down a program of replacing its Treasury and mortgage bonds as they roll off, it would stop the program, he said. “The Fed is benign.”
Washington also is not the positive factor it might be for investors.
“It is clear that the visible stuff that needs congressional passage has been woefully short or woefully late. That’s clearly a disappointment,” he said. But there has been progress made in areas of deregulation, mostly impacting energy and the financial sector.
Doll said investors are no longer anticipating a tax cut this year. Last week, investor expectations for a tax bill hit a low, he said. “When there’s no tax cut, you want to buy FANG stocks,” Doll said, adding value stocks are more attractive when a tax cut is expected.
He said he expects Congress to come up with a tax bill next year, especially since Republicans hope to retain their congressional majority. “Their backs are to the wall to get some legislation done. I don’t think we’ll see any tax bill until next year. … They’ve got to get it done before the election,” he said.
“Earnings matter. Washington does not,” he said. “I’m not dependent on Washington for a better market. I’m dependent on earnings.”
Doll said he expects solid earnings for the next three quarters, but the peak in growth may have been in the first quarter. He prefers the cheaper tech stocks over the FANG names and others that led the market higher recently. “I prefer value over growth, believing the economy is OK and not slowing like some people are fearing. I like cyclical over defensive for the same reason and the fact they are cheaper,” he said. Doll also likes financials and health care, specifically biotech and services.
Whether the market is heading for a broader pullback is impossible to predict, he said.
The market could be heading to a shallow correction, but that could come at any time, he said. “We get 5 percent corrections 2½ times a year on average. We haven’t had one this year. We’re kind of due,” Doll said.