At the start of 2022, Bob Doll observed that the year was shaping up to be a more challenging one for investors, but by the end of it, the Chief Investment Officer says that it was a year for the “history books.”
As he has for more than 30 years, Doll, the Chief Investment Officer at faith-based investment firm Crossmark Global Investments, in January offers his annual top 10 predictions on the trends and issues he believes are positioned to shape the economy and markets for the coming year.
Doll had predicted that solid economic and earnings growth will be a tailwind for equities, while rising interest rates and inflation will be headwinds, likely to create volatility and turbulent churning. Consequently, his 2022 theme was a “Tug of War Between Earnings Tailwinds and Valuation Headwinds.”
So how did he do in retrospect? Overall, Doll notes that, as things currently stand, he will have achieved 7.5 correct predictions for 2022, which he says is consistent with his long-term average of 7–7.5 out of 10.
“After stocks and bonds both declined for each of the first three quarters (not seen in 50 years), the fourth quarter rally was welcome,” the Chief Investment Officer writes.
With that as a backdrop, here's how he evaluates his 2022 predictions:
U.S. real growth and inflation remain above-trend but decline from 2021 levels. Doll scores this prediction as half correct. Real GDP did decline from 2021 levels, but was not above trend; conversely, inflation was above trend, but did not decline, he explains. “Needless to say, nominal growth was significantly above trend and above 2021 levels, but the mix (too little real growth, too much inflation) was problematic,” he writes.
Inflation falls, but core inflation remains stuck at around 3%. This prediction was also half correct, according to Doll, who observes that the notion that core inflation has risen and is stuck is an accurate reflection of the changed economic environment. But while inflation has been falling over the last several months, it has not fallen below year-end 2021 levels.
For the first time since 1958/1959, 10-year Treasuries provide a second consecutive year of negative returns. This prediction was correct. Doll notes that the rise in Treasury yields and fall in bond prices during the year has been “breathtaking,” adding that on top of last year’s fall, the two-year decline in the price of a 10-year Treasury has “eclipsed all modern records.”
Stocks experience their first 10% correction since the pandemic and fail to make the gains that are widely expected. Unfortunately for many, this one was also correct. In making the prediction, Doll explains that they were in a small minority at the beginning of the year predicting that it would be a down year for equity. “Of course, we didn’t expect the carnage to be as severe as it was. And the first half of the year was the first in history to be down more than 20% while earnings expectations moved higher,” he remarks.
Cyclical, value and small stocks outperform defensive, growth and large stocks. This is another prediction that was half correct. In this case, Doll observes that cyclicals “got clobbered” by defensives, while value trounced growth stocks, and small versus big remains close.
Financial and energy outperform utilities and communication services. This prediction was “solidly in the money” thanks to the energy sector’s massive outperformance and communication services underperformance, Doll notes. And while financials and utilities both outperformed, they have made little difference to the overall results of this prediction, he further observes.
International stocks outperform the U.S. for only the second year in the last decade. While noting that this prediction is currently correct, the Chief Investment Officer adds that it could come down to a “photo finish.” At the time of assessing his predictions, Doll notes that international stocks are 85 basis points ahead of U.S. stocks year to date.
Values-based investing continues to gain share. Noting that information is more anecdotal than ideal to evaluate this prediction, Doll observes that it’s clear that the “dialogue, education and adoption of values-based investment management is on the upswing.” This, he adds, is despite all the ESG “noise.”
After a 60-plus-year low in 2021, federal interest expense as a percentage of revenue begins a long-term move higher. With interest rates rising as fast as they have, Doll remarks that this prediction has looked as easy as “shooting fish in a barrel.” Moreover, with debt rising and interest rates unlikely to fall much, “onerous consequences” are likely to be seen as this trend continues, he warns.
Republicans gain at least 20-25 House seats and barely win the Senate. While this prediction looked solid as of election day, the Chief Investment Officer observes that they “missed the mark” on this one, as the usual mid-term election results of the incumbent party losing ground did not materialize.
As for what holds for investors next year, Doll notes that his predictions for 2023 will be released on Dec. 30. As for a teaser, he suggests that the “big investment question” is whether the U.S. experiences a recession, which he believes will depend on whether the fed sticks to its goal of a 2% inflation rate or acquiesces to a 3%–4% rate.
