Doll Offers Mid-Year Update to 2022 Predictions

Bob Doll’s theme that 2022 will be a “tug of war between earnings tailwinds and valuation headwinds” still appears to be holding true, according to a mid-year update to his annual top 10 predictions. 

In fact, the investment landscape will remain difficult in the near term until the outlook for inflation and growth become clearer, says Doll, who is the Chief Investment Officer at faith-based investment firm Crossmark Global Investments.

“Expectations of a recession in the U.S. and Europe have escalated in recent weeks, reflecting the drags of elevated inflation (including for energy), and expected central bank tightening,” writes Doll, who adds that ultimately, the issue for investors is whether central banks can reduce inflation materially without triggering a recession. 

The Road Ahead

The firm’s forecast is that U.S. headline and core inflation will trend lower in the months ahead, suggesting that this backdrop argues for a cautious investment strategy in the near term. 

But the more problematic outcome for investors would be “stubborn headline and core inflation readings” keeping pressure on the Fed to tighten more aggressively. “The result would be a continuation of the horrific first half of the year, with rising bond yields forcing a further de-rating of equities and both bonds and equities suffering further losses in the coming months,” Doll notes. 

He adds that while worries about global growth have increased in recent months, the magnitude of the declines in equity and bond prices is as much a reflection of their prior overvaluation assisted by “easy money” as it is deteriorating economic conditions. 

Moreover, he observes that current fears of a recession are primarily based on potential future policy outcomes rather than on currently measurable risks in the real economy. “Future policy will be data-dependent, so the current recession fears are primarily sentiment-driven,” he suggests.

Consequently, his firm’s base-case scenario is that there is a more profitable path ahead for equities, but emphasizes that it will take time to develop. Beyond the short term, Doll suggests that the fundamentals warrant maintaining an underweight stance on fixed income within a multi-asset portfolio and a neutral stance on equities, with overweight exposure to cash. 

Where Things Stand 

As for his predictions, Doll says that so far, four are heading in the “right direction,” none is heading in the “wrong direction,” and that it’s “too soon or too close to call” for the remaining six.  

1. U.S. real growth and inflation remain above-trend but decline from 2021 levels. At mid-year, Doll observes that it’s clear that inflation will be above-trend and real growth will slow from last year, but the jury is still out on the prediction.  
2. Inflation falls, but core inflation remains stuck at around 3%. Doll believes that inflation peaked in the second quarter, but it’s still too early to call, as his firm won’t know until further into the third quarter whether the prediction holds true. 
3. For the first time since 1958/1959, 10-year Treasuries provide a second consecutive year of negative returns. This is heading in the right direction—even though 10-year Treasuries have rallied in the last few weeks, the pace of yield rise has been blistering again in the second quarter (2.33% to 3.01%).
4. Stocks experience their first 10% correction since the pandemic and fail to make the gains that are widely expected. Also heading in the right direction; it is likely the U.S. stock market is shifting from multiple compression to focus on earnings disappointment.  
5. Cyclical, value and small stocks outperform defensive, growth and large stocks. While cyclicals have outperformed defensive stocks, thanks to energy, the race is close and it’s still too early to call.
6. Financial and energy outperform utilities and communication services. Heading in the right direction.
7. International stocks outperform the U.S. for only the second year in the last decade. Even though international stocks have declined less than U.S. stocks in the first half, the race is too early to call.
8. Values-based investing continues to gain share. Too early to call, but anecdotal evidence points in favor of the prediction, although statistics are not yet available.
9. After a 60-plus-year low in 2021, federal interest expense as a percentage of revenue begins a long-term move higher. This is heading in the right direction; with both federal debt and interest rates rising, this prediction had a tailwind coming into the year.
10. Republicans gain at least 20-25 House seats and barely win the Senate. Early polls give the House prediction reasonable likelihood, but the Senate is too close to call at this date, as many candidates have yet to be chosen.