Stock Market Will Be Flat for a While, Says Bob Doll

Flanked by giddy bulls and gloomy bears, the Nuveen strategist looks for an earnings rebound in the fourth quarter and a lessening of the virus’ malign effect.

With COVID-19 cases mounting in Southern and Western states, what are the prospects for the stock market, which has roared back after its late-winter plunge? Going forward, look for a flat, range-bound performance, says Bob Doll, Nuveen’s chief equity strategist.

At summer’s end, “we’ll find that we’ve gone nowhere,” he said in an interview. Doll expects the S&P 500 to trade in a band from 2,750 (where it last was in early April, rebounding from the winter dive) to 3,150 (its position two weeks ago). The benchmark index closed Tuesday, slightly higher than his range’s top, at 3,198.

Doll contended that this flattish market performance will last for “a few months,” although he won’t be more specific than that. All he’ll say about the future path of the market is that, one year from now, he anticipates it will be higher.

Of course, the rampaging Sunbelt infection rates, with states and localities locking down businesses, don’t appear to bode well for the economy—and thus the stock market. Meantime, there are no shortages of bears roaming around, expecting a prolonged coronavirus problem and a paralyzed economy, which stocks will finally wake up to.

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Some even talk about a reprise of the Great Depression. Example: David Shulman, the senior economist at the UCLA Anderson School of Management, writing in the school’s quarterly research report.

The optimists, certainly, have buoyed the market since late March with expectations of possible virus cures and the soothing application of copious relief money from Washington. In the just-ended second period, the S&P 500 jumped 20%, its biggest quarterly gain since 1998. And, for much of July, the index has continued to advance, capped by a 1.3% rise Tuesday.

What about corporate profits—y’know, the things that are supposed to drive stock prices? In fact, a consensus of market prognosticators believes that, after some rough months, company earnings will turn positive in 2021, according to FactSet research.

Doll splits the difference. He acknowledges that causes for investor qualms—damaged earnings, a divisive presidential election, tensions with China, and yes, the virus—are powerful.

Still, he foresees an earnings rebound sooner than the analysts’ consensus: positive results in the fourth quarter (FactSet says they will be down 12.4% then). The 2020 earnings per share for the S&P 500, he contends, should come in at $124, which would be just 11% less than the 2019 showing.

As he explained it, the 2020 recession will turn out to be “short but deep.” What’s more, in his view, it already is over. “May was better than April” with lowered unemployment and job gains amid business re-openings, he indicated, “and June will be better than May.” The National Bureau of Economic Research, a private body, calls when recessions start and end, although its conclusions come out months after the fact.

Aside from the enormous government stimulus, the economic impact from the virus will lessen, he argued. “This recession has been from an exogenous source,” he said. In other words, it stems from a non-economic origin, and doesn’t sprout from a systemic weakness, like the subprime housing mess of 2008. “So the virus will end up as a less serious shock.”

Americans will learn to live with the virus until a vaccine arrives, he said. Doll takes heart that, while the national epidemic caseload is rising, COVID-19 deaths aren’t expanding apace with it. Experts say that’s likely because this time more younger people are getting infected and they have better odds of surviving.

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Tags: Bob Doll, Coronavirus, COVID-19, Earnings, Great Depression, infections, Nuveen, recession, S&P 500, Stocks

The Kentucky Supreme Court has ruled that a lawsuit brought by eight Kentucky Retirement Systems (KRS) members that accused several hedge fund firms and former state pension officials of breaching their fiduciary duty by using risky investments to cover a pension shortfall should be dismissed. The court ruled that the plaintiffs did not have legal standing because they weren’t personally injured by the alleged actions.

According to court documents, plaintiffs in the case of Overstreet v. Mayberry allege that between 2011 and 2016, the defendants knew that the KRS “faced an appreciable risk of running out of plan assets but concealed the true state of affairs from KRS members and the public.”

The lawsuit alleged that the KRS trustees and officers attempted to “recklessly gamble” their way out of the actuarial shortfall by investing $1.5 billion of KRS’ plan assets in “high-risk ‘fund-of-hedge-fund’ products offered by the defendant hedge fund sellers.”

The plaintiffs also claimed that the investments ultimately lost more than $100 million by 2018 and other accumulated fees were “expected to measure in the hundreds of millions of dollars.” The suit said the losses contributed to what is now a $25 billion funding shortfall in the KRS general pool of assets.

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The plaintiffs claimed the defendants engaged “in a joint enterprise or civil conspiracy to breach fiduciary duties” and had been seeking monetary damages for the shortfall suffered by KRS due to the allegedly risky investments and later use of taxpayer funds to cover that shortfall. They also sought disgorgement of allegedly excessive and unjustified fees from the hedge fund sellers, and looked to remove one of the trustee defendants from the KRS Board, prohibit him from serving on the investment committee, and direct that any hedge fund sellers working inside KRS be removed.

However, according to the state’s Supreme Court, in order to sue in a Kentucky court, a plaintiff must have the requisite constitutional standing, which is defined by three requirements: injury, causation, and redressability. The court also noted that the US Supreme Court has repeatedly reiterated that threatened injury must be “certainly impending to constitute injury in fact” and that allegations of possible future injury are not sufficient.

The court said that if the plaintiffs had not received their vested monthly pension benefits, they would have had the requisite injury to support standing. However, it noted that the plaintiffs have received and will continue to receive all their monthly pension benefits. For their part, the plaintiffs argued that they have standing as representatives of the KRS plan, as common-law beneficiaries of a trust, and as taxpayers of the commonwealth of Kentucky. But in the end, the court disagreed.

“Ultimately, this court recognizes that plaintiffs allege significant misconduct, but, as a matter of law, these eight plaintiffs, as beneficiaries of a defined benefit plan who have received all of their vested benefits so far and are legally entitled to receive their benefits for the rest of their lives, do not have a concrete stake in this case,” the court concluded. “And without a concrete stake in the case, the plaintiffs lack constitutional standing to bring their claims in our courts.”

The court remanded the case to the circuit court with direction to dismiss the case.