Elevated market valuations, combined with rising bond yields and the deceleration of revenue and earnings growth, portend more volatile conditions in the coming year, according to Bob Doll, the chief investment officer of Crossmark Global Investments.
Doll said he expects 2022 will be more challenging for investors as the Federal Reserve and other central banks unwind accommodative policies in response to continued economic expansion and inflation warnings. He also cautioned that “valuation will be of paramount importance in positioning equity portfolios,” and that “we believe that it makes sense to lean modestly in favor of cyclicals.”
The former chief equity strategist at Nuveen and BlackRock said he expects sovereign bond yields will likely rise in 2022, triggering losses on government bonds. He also said “decent” economic growth should enable credit to outperform government bonds, and that interest rate differentials may provide some short-term support for the US dollar.
“Our view is that the equity market is in a tug of war between a good earnings tailwind and a modest valuation headwind,” said Doll, who added that the overall macro backdrop will become less favorable for the equity market in 2022 despite positive earnings. “The Fed’s recent tapering announcement, initiation, and acceleration mark the beginning of a shift toward a less accommodative monetary policy stance along with reduced fiscal stimulus.”
Bob Doll’s 10 Predictions for 2022
- US real growth and inflation remain above-trend, but decline from 2021 levels.
- Inflation falls, but core inflation remains at around 3%.
- For the first time since 1958-59, 10-year Treasurys provide a second consecutive year of negative returns.
- Stocks experience their first 10% correction since the pandemic and fail to make the gains widely expected.
- Cyclical, value, and small stocks outperform defensive, growth, and large stocks.
- Financials and energy outperform utilities and communication services.
- International stocks outperform the US for only the second year in the past decade.
- Values-based investing continues to gain share.
- After a more than 60-year low in 2021, federal interest expense as a percentage of revenue begins a long-term move higher.
- Republicans gain at least 20 to 25 seats in the House and barely win the Senate.
Looking back at his prognostications from the previous year, Doll said six out of his 10 predictions came true in 2021.
Bob Doll’s 10 Predictions for 2021
2. Inflation approaches 2% as the 10-Year US Treasury yield reaches 1.5%.
3. The US dollar sinks to a five-year low.
6. Value, small, and non-US stocks outperform growth, big, and US stocks.
7. Health care and financials outperform energy and utilities.
8. US federal debt rises to more than 100% of GDP to hit an all-time high.
9. The US/China cold war continues, but becomes quieter and more multilateral.
10. President Joe Biden, Senator Mitch McConnell, and moderates achieve legislation compromise.
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