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Bob Doll: 7 Expectations for Markets, Economy

By Dinah Wisenberg Brin

Slideshow November 27, 2023 at 02:15 PM Share & Print

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This isn’t your father’s balanced portfolio — at least as far as likely returns over the next decade — Bob Doll, Crossmark Global Investments’ chief investment officer, suggests.

“The outlook for a balanced portfolio over the next 10 years is unimpressive by the standards of recent decades, reflecting the end of the era of low and/or falling interest rates,” Doll said in an essay Monday.

Near-term risks include the Israel-Hamas war potentially spreading, threatening oil prices; continued defense spending increases for overseas conflicts; “out of control” U.S. fiscal policy; a “somewhat dysfunctional” federal government; and inflation remaining above the Federal Reserve’s 2% target, he wrote.

Doll called the geopolitical environment treacherous.

While he has yet to release his official 2024 predictions, the CIO set several near- and long-term expectations for financial markets and the economy. Check out the gallery for a glimpse into Doll’s thinking.

(Image: Chris Nicholls/ALM; Bloomberg)

Dinah Wisenberg Brin

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Bob Doll: 7 Expectations for Markets, Economy

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1. Lower Returns Ahead

Investors should prepare for lower long-term returns than those enjoyed in the last few decades.

The low-interest-rate era “boosted valuations and returns for most asset classes and is still in the process of unwinding,” Doll wrote. “Investors must beware extrapolating past returns into the future given the shift in the underlying macro backdrop.”

Consistently higher interest rates than in the previous decade imply returns for major asset classes and multi-asset portfolios will be lower than in the past few decades, he said.

Investors should adjust their expectations to account for moderate global economic growth and above-target inflation, Doll explained.

Credit: Adobe Stock

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2. Bouncy Markets for Now

Stock and bond markets should “bounce around for the rest of this year as the bulls and bears alternate,” Doll said.

Crossmark continues to expect the S&P 500 index to trade in a 4,200-to-4,600 range through year-end.

Stocks are becoming overbought but have “reasonably good momentum,” he wrote. Sentiment is turning bullish, and companies overall are saying things have been good but are weakening, and they’re not sure by how much, Doll noted.

Equity valuations are extended now, with stock prices again approaching 20 times earnings, he wrote.

Credit: Shutterstock

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3. Tepid Earnings Growth

Double-digit earnings growth “seems very unlikely” in 2024, even without a recession, Doll says. And earnings may be muted in the longer term as well.

Real earnings rose only modestly as interest rates declined in the past four decades, which contributed to higher stock valuations, he explained.

At the same time there was an elevated return on equity, which probably will translate into a headwind on stock prices in the next decade as ROE reverts to the mean, he added.

“As a result, prospective corporate earnings should be expected to increase at a slower pace than economic growth, thereby constraining returns in the next decade,” he wrote.

Credit: Adobe Stock

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4. 10-Year Treasury to Stay Near 4.5%

The 10-year Treasury yield will probably stay near 4.5% as bond bulls and bears continue a tug-of-war, Doll wrote.

While the bond bulls focus on falling inflation, the bears are looking at the rising national debt, he explained.

Credit: Adobe Stock

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5. Cycle of Debt Continues

The arrival of non-transitory inflation and higher interest rates have rapidly accelerated the federal interest expense, Doll noted. With Republicans apparently unwilling to cut taxes and Democrats hesitant to lower spending, there seems to be little political appetite to change this trajectory, he said.

That means “more borrowing in the future, likely at higher interest rates to service a mounting debt obligation, which could throw more fuel on the inflation fire,” Doll said.

As far as fiscal policy, Doll said, the fact the federal deficit doubled to $2 trillion from $1 trillion in a moderate-growth economy “is downright scary.” Interest expense is that deficit’s fastest-growing component.

Credit: Adobe Stock

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6. Mild Recession Ahead

Crossmark continues to expect a mild recession in the next six to 12 months. Earlier this fall, Doll said sticky inflation, tight monetary policy, and the lagged effects of current economic policies make a recession likely in the near future.

Reasonably good consumer and corporate balance sheets and lower-than-usual credit problems on bank balance sheets should keep the recession mild, he wrote at the time.

Credit: Adobe Stock

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7. Inflation Above Fed’s Target

Doll is “reasonably confident” that inflation will continue to moderate but expects it to stay above the Fed’s 2% target.

While the central bank is unlikely to raise interest rates again in the near future, Doll, unlike other market prognosticators, doesn’t expect the Fed to start cutting rates by mid-2024. And if there’s no recession, the Fed might not cut rates at all next year, he wrote.

Fed Chairman Jerome Powell has said the central bank isn’t confident yet that its policy has been restrictive enough to put the economy on a path to 2% inflation over time, Doll noted.

Doll also said the economy hasn’t completely absorbed the lagged effects from the Fed’s aggressive rate hikes from zero to 5.25% over 18 months.

Credit: Adobe Stock

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