In his annual economic predictions last year, Bob Doll, president and chief investment officer of Merrill Lynch Investment Management hit .700. If he is anywhere near as accurate for 2005, we’re in for a rocky year.
Last year, Doll correctly foresaw that the U.S. real growth would reach 4 percent in 2004; that the stock market would beat cash and bonds, but fall short of 2003 returns; and that the Republicans would “convincingly” win the 2004 elections. Among his inaccurate predictions: He missed the yield on the 10-year Treasury note and on the transition to higher-quality, higher-cap and lower-beta stocks.
His 2005 predictions, announced with fanfare at Merrill Lynch offices in the World Financial Center, paint a not-very-rosy picture for the American economy. He’s not entirely pessimistic, but he calls 2005 a “muddle-through year,” one in which the American dollar will continue to struggle and Wall Street profits will be “sluggish.”
Doll forecasts real GDP growth to slow less than 3.5 percent and expects a further rise in the interest rate, up to 3.5 percent. He predicts stocks will struggle, but they will still best cash and bonds for the third consecutive year.
His most interesting prediction for Rep. readers: Increased merger and acquisition activity, particularly in the brokerage sector. “You have to be reasonably optimistic for the brokerage industry, because of that great potential for consolidation,” he said.
He would not elaborate on which firms might take part in the consolidation—his own firm, of course, has been the subject of many such rumors. But he said banks could well be the prime movers.
Doll’s 10 predictions:
- Led by a slowdown in consumer spending, U.S. real GDP growth will slow to less than 3.5 percent.
- Every major economy in the world slows, but Asia continues to lead while Europe continues to lag.
- Profits advance less than the 10 percent forecast as surprises are no longer positive due to slowing demand and some margin pressure.
- Interest rates continue to move higher as the “bear flattener” takes the Fed’s rate to 3.5 percent and drives 10-year Treasury yields to 5 percent.
- U.S. stocks struggle but outperform bonds and cash for the third year in a row.
- The average stock will underperform its index for the first time since 1999 as large-cap and high-quality stocks outperform small-cap and low-quality stocks.
- Strong balance sheets and high excess cash-flow generation creates an increase in M&A activity along with dividend increases, stock buy-backs and capital spending.
- Commodities perform well again, with oil prices averaging more than $40 a barrel.
- Optimism from Washington regarding the passing of market-friendly legislation will give way to intra- and interparty bickering.
- While significant structural problems remain, the U.S. federal budget deficit, trade deficit and current-account deficit will all improve for the first time in 10 years.