Even though a recession never materialized, 2023 ended up being a challenging year for investors with the Fed calling the shots, Bob Doll observes in looking back on his 2023 predictions.
As things currently stand, he will have achieved just 5 out of 10 correct predictions for 2023, which he notes is one of his worst years on record and well below his long-term average of 7.0–7.5.
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.
With 2023’s theme focused on the Fed’s decision-making, Doll at this time last year explained that the decisions the Fed makes would have a “profound impact” on earnings generation and that the key economic question was whether central banks would be able to bring down inflation to acceptable levels without a recession. To that end, Doll’s firm expected the Fed to raise rates to 5% or more and keep the rate at 5% or above for the balance of the year.
“Multiple expansion despite flattish earnings confounded most investors even as a much-anticipated recession did not materialize,” Doll writes. “Investors enjoyed falling long-term interest rates in the back part of the year, even as the Fed raised rates multiple times reaching the 5¼% level.” He adds that equity concentration “accelerated with the Magnificent 7 far outpacing the average stock,” and that volatility levels were low most all year, especially for stocks. “By year’s end, investors were counting on Fed rate cuts early in 2024 to validate the multiple expansion,” the Chief Investment Officer further noted in his year-end wrap-up.
With that as a backdrop, here's how he evaluates his 2023 predictions:
Prediction #1: The U.S. experiences a shallow recession as real GDP is in bottom 10 of the last 50 years. As alluded to earlier, this prediction was incorrect, as the “much-anticipated recession failed to materialize.” That said, Doll warns that the typical lead indicators of recession (yield curve, LEIs and money supply) are still “flashing caution.” “It is possible and perhaps even likely that the maximum impact of the 18-month 0% to 5¼% Fed funds rise has yet to be felt,” he observes.
Prediction #2: Inflation falls substantially, but remains above the Fed’s target. This prediction was correct. While inflation has fallen from its peak, the decline from 3%–4% to the Fed’s 2% goal remains elusive, Doll notes.
Prediction #3: Fed funds reach 5% and remain there for the balance of the year. This was another correct prediction, and a rather bold one at the beginning of the year, which, he explains, was tested several times, especially during the spring banking crisis when the consensus call was for three Fed cuts by year-end, not a rise to 5¼%. Doll adds that this variable will be watched carefully and discussed as we enter 2024.
Prediction #4: Earnings fall short of expectations in 2023 due to cost pressures and revenue shortfalls. As another correct prediction, Doll observes that earnings were one of the “fascinating items” in 2023. “For the first three quarters, earnings came in less bad than feared, but during the interim periods, estimates kept falling as cost pressures made it difficult for companies to meet earnings targets despite legitimate pricing power,” he writes.
Prediction #5: No major asset class is up or down by a double-digit percentage for only the fourth time this century. Even though they warned themselves that this prediction comes true only about 20% of the time, their thought that markets would be more range-bound proved inaccurate as stocks catapulted higher, led by the Magnificent 7, the Chief Investment Officer notes. “If we had said the ‘average’ stock, instead of cap-weighted index, we would have scored on this one,” Doll stated.
Prediction #6: Energy, consumer staples, and financials outperform utilities, technology, and communication services as value beats growth. As stated in their quarterly reviews of the 10 predictions, this one was way off the mark. Doll concedes that not only did growth beat value, but technology and communication services were the two best sectors—while energy and consumer staples were two of only four sectors that were down for the full year, adding that the so-called Magnificent 7 appeared to skew sectoral performance.
Prediction #7: The average active equity manager beats the index in 2023. Further pointing to the strength of the Magnificent 7, Doll observes that the severe underperformance of the average stock, and active managers trending toward more equal than cap-weighted portfolios rendered this prediction incorrect early in the year.
Prediction #8: International stocks outperform the U.S. for the second year in a row (first time since 2006-2007). “The sharp outperformance of mega-cap growth (U.S. centric) and the rally in the dollar along with economic weakness in many parts of the globe caused another inaccurate prediction,” Doll further remarks.
Prediction #9: India surpasses China as the world’s largest population and fastest growing large economy. With India surpassing China as the world's most populous country early in the year, this prediction was correct. China’s difficulties with real estate, an aging population and slowing growth were contrasted by India’s strong economic growth and continued ascendancy, the Chief Investment Officer explains.
Prediction #10: A double-digit number of candidates announce for President. This prediction, perhaps not surprisingly, fell into the correct column, as a double-digit number of presidential candidates materialized on the Republican side alone.
As for what holds for investors next year, Doll notes that his predictions for 2024 will be released on Dec. 29. As for a preview, he suggests that the “big investment question” is whether the consensus view of double-digit earnings growth, no recession, and Fed rate cuts commencing early in the new year can all come together. “We are dubious that all these good things can happen simultaneously. Either way, the investment landscape will undoubtedly be exciting and challenging,” he emphasizes.
