Stocks could test lows before breaking out, Bob Doll says

Nuveen Asset Management chief stock strategist Bob Doll said the market is likely to re-test its lows before it can get back on the path to new highs.

"I'd be surprised if it's over," said Doll, chief equity strategist and senior portfolio manager. "The Friday rally and price points were pretty good, but the internals—the advance/decline line etc.—were not as positive as prices.I think we have to go back and test the lows."

The strategist, in a phone interview, said the market could see a replay of the sell-off in January and February, when it took stocks a while to return to lows and then months to regain highs. "I don't expect in two weeks to see an all-time high. Last time, it took six months and it could again," he said. "It's normal 5 to 10 percent corrections happen three times a year. This is only our second."

"I feel pretty good the bull market is not over," he said. "

On Thursday, the S&P 500 hit an intra-day low of 2,710, a 7.8 percent decline from its all-time high in September. The S&P rebounded Friday, and was trading down 3 points at 2,763 Monday. Strategists have been expecting a positive end to the year, since the market is typically stronger after mid-term elections.

"I think the seasonal period that we'll be heading into soon is more constructive," said Doll "If you look at those studies, November to May does better. .. From mid-term election day out 12 months, the stock market has not been down in that period since the 1940s...It's a nice bullish piece of history."

But stocks will face new issues in the coming year. Doll said earnings and margins could be challenged, particularly since companies will have to pay up to hire workers in the current environment. After 2018's earnings growth of about 24 percent, earnings growth is expected to slow to about 10 percent, according to Thomson Reuters.

"I'm not concerned about cost pressures yet but i am for next year...You can't get low double digits without margin improvement and I think margins may not go up next year, and I think you're going to have sales growth but sales aren't going to go up 10 percent," he said.

Doll said while the market was shaken by Fed Chairman Jerome Powell's comments about the Fed having a ways to go with rate hikes, the sell off is actually technical in nature. "It always gets exaggerated as it did in February with risk party [trades] and people selling programatically. These things get exaggerated in both directions," he said. "...There are programs out there that say when you break certain levels, you sell stocks. That's momentum. Post the January-February correction I was firmly of the view that...half of it was the program stuff."

Doll said the market can tolerate higher interest rates and a stronger dollar.

"The stock market can handle higher rates at a slower pace. You can't have rates jumping 40 basis points in a couple weeks and expect the stock market to say 'I don't care.," he said.

In the current rout, investors dumped growth and stocked up on value names, like consumer staples.

"It's never black and white...It's just get a little more balance in your portfolio. Don't sell every growth stock you have but you better have some value in your portfolio. In the next six to 12 months, what's going to outperform? I would say value," said Doll. "Rising rates is part of it but we also have a broadening economy."

Doll said trade wars, particularly with China, could continue to spook stocks.

"It's going to be around for awhile. W'ere not going to solve China that fast," he said.

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