Bob Doll: 'Buy High, Sell Higher' in This Risky Market

News October 18, 2024 at 04:38 PM
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What You Need To Know

  • Investors should participate even in a momentum-driven market, Doll says.
  • A bumpy landing is mostly likely for the economy, according to the investment chief.
  • Doll acknowledges that his recession call for this year was likely wrong.
Bob Doll on a blue investment themed background

The United States remains in a "high-risk, momentum-driven bull market" in which stock investors should focus on high-quality companies with earnings predictability, earnings persistence and good cash flow generation, Bob Doll, Crossmark Global Investments' CEO and chief investment officer, said Wednesday.

"Those stocks have done just fine on the way up, and we think should the market get a little queasy and have any kind of selling spree, those stocks will go down somewhat less," he said said during his fourth-quarter investment update webcast.

High valuations present high risk, Doll noted. Technically, the market has actually broadened and looks better, he said.

"Predicting the end of a momentum-driven market is a fool's game," Doll said, as he has before. "There are no particular signals that tell you a momentum-driven bull market is about to end. Therefore, you need to participate." The market strategist said he was revising the "buy low, sell high" advice to "buy high, sell higher."

Citing recent "massive" revisions to government economic statistics, Doll also said that the economy is stronger than previously predicted.

"Any of us who had a somewhat cautious view about the economy and slowing and so on … we've had to take a pause because these revisions were so substantial and all to the upside that the economy has done better and therefore has more room to do better than we all previously thought," Doll said.

A Bumpy Landing?

Doll touched on his 10 Predictions for the year as he nears the point when he'll be issuing new ones for 2025. Among the points discussed during the webcast, he said that while the Federal Reserve's recent 50-basis-point interest rate cut boosted the odds for an economic soft landing, Crossmark sees a bumpy landing as more likely.

The firm sees a 40% possibility for a bumpy landing, 30% for a hard landing, 20% for a soft landing and 10% for "no landing," although Doll quipped that he wasn't sure what the last one means.

"One industry struggles, the next one's doing OK, and then it becomes vice versa. It just kind of bumps along and you can't see good news but there's not a whole lot of bad news," he explained.

Doll also expects two 25-basis-point cuts before year-end.

No Recession, Yet

Doll had predicted a mild recession for this year, with unemployment surpassing 4.5%.

"We might get one in 2025, but a year ago we said we might get one in 2024," so either it's way too early or "it ain't going to happen. We'll see," he said.

The unemployment rate is rising and payroll growth slowing, Doll noted, saying it's possible that unemployment could hit 4.5% at year-end.

"What the Fed has done, what the economy is doing, what consumers and businesses are doing will tell us" whether the slowdown is real and will lead to a soft perfect landing or a bumpier one, he said.

Possible New Inflation Floor

Doll also had predicted that the 2% to 3% inflation seen in the 2010s will become the 2% to 3% floor for the 2020s.

"Our argument is the 2% Fed (inflation) target is going to be at least elusive. We're not going to get there. Our longer-term view is inflation's going to be closer to 3 (%) for this decade, having been closer to 2 the last decade, which is a big difference when you look at valuation for, obviously, stocks and bonds, among other things," he said.

Weaker Earnings?

Crossmark is also doubtful about expectations for double-digit percentage earnings growth heading into 2025, Doll said, explaining that such increases in the United States typically follow recessions.

When price-to-earnings ratios are over 20, as they are now, "forward, one-, three-, five- and 10-year returns are at best mid-single digits, which is our best guess for the stock market over the next five to 10 years," the CIO said.

Doll noted that the market has broadened beyond "Magnificent Seven" mega-cap stock leadership, with the group, minus Tesla, basically flat in the third quarter, trailing the S&P 500, which was up 6%.

"So the tenor of the market has certainly changed," he said.

The Magnificent Seven did account for 44% of the S&P 500′s year-to-date return at Sept. 30, Crossmark noted.

What to Do?

In a market, economy and geopolitical environment with many troubling and reassuring signs, Doll suggested that investors:

  • Expect choppy markets, buying on dips and trimming in rallies.
  • Focus on earnings growth and free cash flow, not P/E expansion.
  • Own some quality fixed income.
  • Diversify across asset classes and geographies, including more non-U.S. securities.
  • Own high-quality value and less expensive growth.
  • Consider an absolute return strategy to complement market exposures.
  • Be prepared to step up if there are significant weakness.

Image: Chris Nicholls/ALM; Bloomberg

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