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Bob Doll: Recession Unlikely by Year End

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What You Need to Know

  • Inflation is falling but likely to remain too high by year end, the forecaster says.
  • In the right circumstances, the S&P 500 could see a 'nice rally.'
  • The stock market probably hasn't hit a durable bottom.

Crossmark Global Investments Chief Investment Officer Bob Doll doesn’t expect the U.S. economy to tip into a recession in 2022 and sees an opportunity for a stock market rally.

Doll, who joined the faith-based investment firm a year ago, offered these and other market insights Wednesday during a webcast Q&A session co-hosted with Crossmark’s chief market strategist, Victoria Fernandez.

Recession Possible but Unlikely

A recession is unlikely this year given consumer and corporate financial health and the strong labor market, although there’s “never a zero probability,” Doll explained. In any given year there may be a 15% recession probability, so now there could be a 30% likelihood, he added.

“Yes, it is very difficult for the Fed to thread a needle” and lower inflation without tanking the economy, he said.

While not as strong as before, though, consumers have lots of cash on their balance sheets, Doll noted. Also, he added, “Corporate America is in great shape,” with cash on balance sheets and insiders buying their own stocks at a pace not seen in a long time. Some companies may experience earnings problems but he isn’t convinced that’ll cause a recession.

“The labor market is hot. You cannot dispute that and we’ve never commenced a recession with the labor market this strong,” Doll said. “If there is a recession, our guess is it’s not a very deep one.”

A Bit More Room for Stock Slide

Stocks have room for another 5% slide, barring a recession, Doll predicted, saying the market recently became oversold.

“If we have a recession this year, more downside is likely,” he added. A couple of weeks ago, Doll said, “we reached a bottom, but not the bottom.”

The market needs more of a “give up” to see a more durable bottom — more names on the new-low list, “put-call ratios exploding” — and “we have not seen that sort of thing,” he explained. (The put-call ratio signals market sentiment, with a bearish outlook indicated by more “put” options to sell a security at a set price versus “call” options to buy.) 

A ‘Nice Rally’ Possible

Doll also sees the possibility for stocks to climb and said they could be experiencing a rally, although he doesn’t think the stock market has hit bottom. If the U.S. experiences no recession, Europe sees no notable recession and China emerges from its COVID-19 lockdown doldrums, a scenario that he considers possible, the S&P 500 could see a “nice rally” back to 4,500, he said.

When the S&P 500 slid to a 52-week low of just over 3,800 last month as investors feared recession and Fed rate hikes, “the mood just got too heavy,” Doll said.

Investors should pay attention to corporate earnings in the second half, as some companies will hit the mark and others will miss. “We’re in an environment where stock picking becomes more and more important,” Doll said.

Some Favorite Picks

Crossmark remains overweight value stocks compared with growth but is less dogmatic about it now than earlier in the year, Doll said.

The firm entered 2021 predicting energy and financials would outperform communication services and utilities and got it mostly right, he said. Utilities have outperformed the market in a flight to safety, but Doll has further reduced his underweight there, noting, “If we’re not going to have a recession I don’t want to own utilities.”

Energy stocks have significantly outperformed the market and aren’t expensive relative to earnings and cash flow, Doll said. “I have taken profits in energy, I should have added to them,” he said. “I don’t think the sector’s finished.” If there’s a pullback, he said he’d use the weakness to add.

He also likes financials, which he said have safe balance sheets and are “very cheap” by various measures after struggling early this year; he cited insurance companies as a good choice for stability and banks for more aggressive investors. 

Doll also likes HMOs and profitable big tech companies like Microsoft and “old tech” firms. (In interviews several weeks ago, he included Cisco and Intel in the latter category.)

Inflation Probably Down but Too High by Year End

Inflation probably peaked in March, when it surpassed 8%, but isn’t likely to return to 2% to 3% by year end, Doll said.

“Because it went from 2 to 8 doesn’t mean it’s going back to 2,” he said.

Inflation could reach 4% or 5% by year end, but even that level is too high, according to Doll. 

“It’s better than 8 but we can’t live with 4 or 5,” he added.

Consider Alternatives to 60-40 Portfolios

The traditional 60-40 portfolio — 60% stocks, 40% bonds — worked well for decades but investors may want to consider a different allocation now, Doll said. He suggested a 60-20-20 arrangement that includes 20% alternative investments that “behave like fixed income” but without the interest rate sensitivity.

“We’re in a hiatus here for the bond market,” he said. Yields may decline if inflation continues to come down, but the market may not have reached the high yield in the current cycle yet, Doll added.