It’s going to be a “sideways” market, and no asset class is going to be up or down by double-digit percentages this year, said Bob Doll, the chief investment officer at Crossmark Global Investments, in his annual list of 10 new year’s predictions, which he presented Tuesday.
“That may seem like a sure bet, but actually it seldom happens” that no asset class rises or falls by more than 10% for an entire year, Doll said in a webinar announcing his predictions. “Almost all asset classes will do better than they did last year, but they will still remain moderate. Stocks and bonds are no longer crazy expensive, but they are still not cheap.”
Doll, a recognized industry thought leader whose New Year’s predictions are an anticipated annual financial event, said the United States is probably headed for a mild recession this year. “However, it will not be officially declared a recession until after it is over” because there is a lag time in making the determination. He added that, in terms of real GDP, 2022 was among the 10 worst years of the last 50. At the beginning of 2022, Doll predicted there would not be a recession last year.
“Now, I’m concerned about the Fed continuing to raise interest rates,” he said. “It’s going to be a bumpy ride this year, and investors need to own stocks that can weather the storm.”
Central banks in other countries still have more work to do in raising interest rates to bring down inflation in the rest of the world, he added.
The fact that consumer demand remains strong and consumers still have more than $1 trillion sitting in cash argue against a big recession domestically.
One of the big pending questions hanging over the economy is what happens to inflation, which soared last year. This year it will fall substantially (it has already started to happen), “but it will not fall as low as the [Federal Reserve Board] wants it to.” Doll said the Fed should not raise rates any further to slow inflation since there is a lag between rate increases and an inflation decrease, “but they probably will.” Inflation will fall to 4% to 5%, but not to the Fed’s target of 2%.
“If the Fed insists on their 2% target [and continues raising interest rates to try to achieve it], a recession is almost inevitable,” he predicted.
The dollar will fall in value during 2023 and corporate earnings will fall short of expectations, Doll added.
Sectors that will come out on top for the year include energy, consumer staples and financials, while utilities, technology and communication services will not do as well.
Active equity managers should have a good year, with most beating the index, he said.
But the U.S. economy will grow slowly, paving the way for international stocks to outperform domestic stocks for the second year in a row. Emerging markets should also offer investors opportunities “for those who have the stomach to weather the ups and downs,” Doll said.
Going farther afield to the international arena, he predicted India would surpass China in population and become the world’s fastest growing economy. “But globalization is flagging as nations retreat into nationalism.”
Dipping a toe into politics, Doll predicted that the split Congress will have a difficult time getting anything accomplished and that a double-digit number of candidates will announce a run for president. “The moderates in Congress from both parties are gone,” he said, making compromise almost impossible.
Bonds, which deserve a new place in portfolios, will peak this year, and small caps will continue to do better than large caps.
In the end, investors should expect choppy markets and focus on companies with potential earnings growth and bottom-line strength, but they would do well to not set their expectations for returns too high.
“Last year, a portfolio of 60-20-20 [stocks to bonds to alternatives] looked good, but it will be easier to argue for the traditional 60-40 portfolio this year,” Doll said. “Eventually, the focus will turn towards better economic prospects for 2024. When that occurs, bonds should falter and equities can rally.”