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Bob Doll

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Bob Doll: Biggest Risk Now Is Weak Earnings

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Market volatility will remain high through the second half of this year, predicts Bob Doll, Crossmark Global Investments chief investment officer.

But Doll still doesn’t expect a recession will happen in 2022. If it does happen, 2023 is more likely, he says.

Meanwhile, Doll, who joined the faith-based investment firm a year ago, sees the largest risk for investors as earnings reports by the companies they are invested in, noting he expects mixed results.

In a phone interview, we asked Doll a few questions about the state of the current market and where he thinks it’s headed.

1. What’s your view on where volatility is headed in Q3 & Q4 and why? 

My view is volatility is going to stay high. But I think it’s going to be a bit more mixed in both directions as opposed to up one step, down four steps, up one step, down four steps. So I think we’re going to be in a choppy, sidewise period.

Why volatility? Extraordinary amounts of uncertainty: monetary policy, fiscal policy, foreign policy, earnings uncertainty. So I think that just keeps volatility high. And bear markets tend to be more volatile than bull markets.

2. What are the greatest risks and opportunities for investors in this environment and why?

I think the biggest risk at the moment is earnings. I think we’ve moved from a P/E downward move in the market of significant proportions to one where P/Es are not going to be the story.

The story from here is going to be how do earnings come through. And I think the answer’s going to be mixed. Analysts have kept their numbers firm, even as economic activity and estimates have weakened.

I think the biggest opportunity is, if inflation does show signs of peaking, I think the market will breathe a sigh of relief, both bonds and stocks. And I think the probability of that is reasonably good.

The first half of this year, we have a massive headwind on valuations, a modest tailwind on earnings.

I think the second half it’s going to be a modest headwind on earnings and valuations … a sideways kind of thing. It’s going to go up a little, go down a little, depending on inflation. If we get some relief on inflation, we can get a point or two of P/E back as earnings challenge.

3. What chance of a recession do you think there is today and why, and to what extent has the (equity) market already discounted a recession? 

I’ll use numbers as if I have any clue or any precision. My view coming into the two weeks, almost three weeks ago, inflation number: disappointment. Coming into that was 30% as a result of that bad print on that Friday. I raised it to 40, still indicating I think it’s less than 50% in calendar 2022.

I think [a recession is] more likely in 2023. I do think at the recent low, the stock market was discounting, I don’t know, 70, 80% chance of recession. Some of that’s come out with this, what are we up? Seven, eight percent from the low of two Fridays ago. So I think there’s more recession in the market. At least the P/Es, we’ll see about earnings.

4. Do you think the markets are oversold, and where do you see the major indexes ending 2022 (Dow, S&P, Nasdaq) and why?

Yeah. I mean, two weeks ago we put this in our weekly commentary, pounding the table, oversold.

Any survey you look at showed a high number of bears, a small number of bulls. So we were oversold. It doesn’t guarantee anything but it suggests the probability is for a bounce.

This is the third bear market rally we’ve seen. The first one February to late March was 13%. The second one late May to June was 9% using round numbers.

My target on this rally has been 4,000. We’ll see if we get there or not.

Where do we end the year? So I, at the beginning of the year, established a target for the S&P of 4,500. One of the few calling for a down year.

As a portfolio manager, I spend most of my time buying and selling stocks. So I don’t change my views. I just get ‘em right or I get ‘em wrong.

Can we get to 4,500 this year? If we have a recession, no. If we don’t have a recession, maybe.

So my guess is we’re going to end the year higher than where we are today. But certainly lower than where we started the year. I do not think we make a new high.

A new high: [such as] 4,800? That may take a couple of years.

5. What should advisors be telling clients at midyear?

Tried and true, focus on the long term. Why are you in the market? What’s your time horizon? What are you trying to get done?

I would use this bear market as an opportunity to make sure my clients understand that lower expected returns in stocks and bonds going forward are the order of the day. When stocks go up 15% a year nobody believes you when you say that they’re going to slow down.

I would also say that we are more likely to be in a period where the good old fashioned buy ‘em and hold ‘em is not going to be as effective. I’m not saying you have to become a trader. But I think we investors are going to have to be a little more opportunistic.

When there’s a lot of red on the screen for a couple of, three days in a row, and your stomach doesn’t feel so good, buy a few stocks.

And, conversely, when it looks like it’s safe to put your toe down in the water and it’s all green and it looks like we solved some of our problems, maybe you sell a stock or two. That’s what I’m trying to argue that advisors need to do themselves and educate their clients.

(Image: Bloomberg)