The U.S. will need to face a recession if inflation is to be brought down to the 2% that the Federal Reserve Board wants, according to Bob Doll, chief investment officer for Crossmark Global Investments, a faith-based investment firm headquartered in Houston.
Until the country sees concrete signs that the soft-landing economic scenario is materializing, Doll said investors and their advisors should continue to use a defensive investment strategy to focus on capital preservation.
“Inflation is not horrible,” Doll said in an interview shortly after the release of the CPI yesterday, which pegged inflation at 3.7%, a number that has held relatively steady for three months. “But just under 4% is not 2% and the Fed wishing it were 2% is not going to make it a reality.”
It will take until the end of the year to feel the effects of the rapid increases in interest rates that the Fed has imposed in the last few months, Doll added, “but without a recession, inflation is not going to drop to the Fed’s goal of 2%.”
Doll added that he is not “bearish” on the market, but he is cautious.
The conflict in the Middle East will not have an overly significant impact on the market, he said. “For the market, the U.S. Treasury yield is more important than what is happening in the Middle East,” he said.
Third-quarter corporate earnings reports will also have a significant impact, he said.
Doll acknowledged the overall positive equity performance this year challenges the idea that a recession is coming, but he noted that much of the gains were driven by AI-related stocks.
“The U.S. consumer will likely determine whether or not the economy enjoys a soft landing,” Doll said in the most recent “Doll’s Deliberations” commentary, but “we are not optimistic.” We see “rising stock prices and upside economic surprises starting to unwind. The recessionary clock is indeed ticking.”
Further supporting his cautionary tale, Doll said U.S. economic growth is being supported by real wage growth and the prevalence of excess savings, both of which are likely to be fleeting. “Recent labor market data points to increasing odds that incrementally weaker labor demand will show up in the form of higher unemployment,” another factor that would precipitate a recession, he said.
In the meantime, advisors and their clients should make their equity choices by focusing on “earnings predictability, earnings persistence, companies’ good and growing cash flow, and reasonable valuations.”
On the quasi-positive side of the argument about a whether a recession is coming, Doll said Crossmark anticipates a recession would be mild because consumers and corporations have reasonably good balance sheets and banks are carrying few credit problems on their balance sheets.
At the same time, Doll said he anticipates the labor market to continue to deteriorate and the unemployment rate to rise. The bottom line at the end of the third quarter is that Crossmark expects the stock market to tread water for now, with the S&P 500 coming in at between 4200 and 4600, as it has done since June.
