Stocks Have Not Reached Bottom Yet: Bob Doll

The current bear market likely hasn’t hit its true bottom yet, Bob Doll, chief investment officer for Crossmark Global Investments, said in commentary released Monday, suggesting there’s only a one-third probability that June 16 marked the equity market low for this cycle.

Equity prices should be higher in six or 12 months, though, based on Crossmark’s “mildly constructive” economic outlook, the strategist suggested.

“We believe the equity market rally is [a] counter trend and nearing its peak,” Doll wrote. The economy is decelerating, expectations for corporate profits are too high and it’s premature to look past Federal Reserve activity, he explained.

It’s very unlikely the Fed will start cutting rates anytime in the next six months, despite recent financial market moves indicating expectations that central banks will pivot from hiking to cutting interest rates based on weakening economic conditions, Doll said.

“The unemployment report for July was much stronger than expected and undermines the argument that the U.S. economy is in recession or will be so imminently. It also increases the odds of another 75 (basis points) Fed rate hike next month,” he wrote.

Inflation can probably fall back to 4% to 5% fairly easily but getting to 2% will require higher unemployment and a higher federal funds rate next year than the market is currently calculating, according to Doll.

Valuation multiples have led the recent stock market rally, with the S&P 500’s forward price-to-earnings rate rising to 17.2 from June’s 15.3 low, Doll said, adding that fair value likely ranges from 15 to 17.

Stocks and bonds were “deeply oversold” in mid-June and overdue for a bounce, according to his commentary. While the global economy faces challenges, Doll doesn’t see recession as imminent or inevitable. He does expect growth to keep slowing.

“Our base-case scenario is that the U.S. economy will avoid recession. Even so, underlying domestic demand growth will be muted over the balance of the year as employment gains eventually moderate from their unsustainable high year-to-date level,” Doll wrote. 

G7 country government bonds are “somewhat oversold” and yield could retreat further near term, but Crossmark expects yields to be higher in 12 months, he said.

As for stocks, Doll said, “We expect equity market conditions to remain choppy in the near term given elevated uncertainty about global economic growth. Our mildly constructive economic outlook, however, implies that equity prices should be higher on a six- to 12-month horizon.”