The Big Money Goes … Neutral?

Some big money managers are beginning to use the word “neutral,” which sometimes is Wall-Street-speak for “bearish.”

I typically pay close attention to what institutional investors say, as they can move the market whether they’re right or wrong, providing buy and sell opportunities.   

That’s why I was intrigued when at a lunch presentation I attended last Friday in Tysons Corner, Va., famed money manager Robert C. Doll categorized his market view as “neutral” when I tried to pin him down.

Doll, who now manages the $129.8 billion Nuveen Asset Management, was previously BlackRock’s chief equity strategist, and gave a rousing presentation to a room packed with financial advisers, and one investment analyst, yours truly.  I was told they collectively manage over half a billion dollars.

In fact, Doll often did sound like a bull when ticking off improvements in the job market, rising wages, housing starts and banks loans. And he said he considered us still in a bull market, which was a little confusing given his “neutral” stance.

The lunch that I went to is a common weekly or monthly staple of financial advisers.

It’s rare, however, to have a chief equity strategist of Doll’s stature make the presentation.  But the amount of money in the room under management was also uncommon, others noted. Doll is as close to a rock star fund manager as it gets, with his regular commentary on CNBC.   

That’s why in this special Income without Borders we’ll share Mr. Doll’s views and compare them with our own investment thesis. In the subscribers section, we provide a portfolio update.

Doll’s Take

Doll believes markets will trade sideways for some time as a result of what he believes will be heightened volatility in the coming months, particularly after a Fed rate move.

But he was quick to point out that the average historical S&P 500 performance after a first Fed rate hike is 4.1% after 6 months, 7.3% after 9 months and 9.5% after 12 months, one of the arguments that made me continue to believe he was perhaps bullish.

Add to that, he showed a chart going back to 1905 illustrating that all the years ending in 5 have been positive. And that the S&P 500 has been positive in the 12 months following a mid-term election since 1946. Seemed bullish to me.

But again, ask him if he’s a bull and he was quick to say that it’s hard to tell as overseas markets represent the biggest risk to the U.S economy as 1) China continues to deteriorate 2) Eurozone growth remains tepid 3) the Japan recovery stalls and 4) Brazil and Russia is in recession.

Though he takes a fundamentals and quantitative approach, he also outlined how “damage” had been done to markets from a technical standpoint as there has been 1) substantial pick-up in new lows 2) moving averages had been broken and 3) the market had poor breadth.

He also showed two charts showing a Bull & Bearish Index which was increasingly bearish, and new trade sentiment indexes also show extreme pessimism. Then he showed a Citigroup panic/euphoria model going back to 1987 that also shows markets trending toward panic.

While I couldn’t pin him down beyond “neutral” he was clear when I asked what factors would have to deteriorate to convince him that we were in a bear market; 1) a change in China’s policy 2) a continued decline in commodities and; 3) U.S. earnings decline.  

Our Take On Doll’s View

The reality is that the market is difficult to forecast right now, and like Doll, we have been arguing since the summer that the markets would be increasingly volatile. And like Doll, we have put specific bets on certain sectors that can withstand these uncertain markets.

Institutional investor sentiment tends to turn as slowly as a cruise ship given the billions managed and invested. I view mutual fund manager sentiment changes as a general indicator of a broad directional trend in the market, which is increasingly bearish.  

While I thought Doll would like to be bullish, I clearly got the sense that he was slowly turning toward an overall bearish sentiment. I would say I am overall more bearish than him, as we were not in complete agreement on the strength of the U.S. recovery, the implications of China and some other fundamentals.

But in terms of sector preferences, I agreed with him on his focus on Healthcare and Telecommunications, though I’m more bullish on the recovery of Europe and have a stronger emphasis on utilities, which have been rebounding since the August correction. I also don’t view technology as an income investment.

But we were in complete agreement that investors should “think about the long-term and remain diversified” in this environment, and have made a focus on free cash flows a major mantra at Global Income Edge.


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