Market strategist: 'Good earnings are necessary' to counter valuation headwinds

Crossmark Global Investments Chief Investment Officer Bob Doll joins Yahoo Finance Live to discuss earnings season outlook, rising prices in consumer products, interest rate hikes, the Fed, managing investment portfolios in volatile periods, and cyclical stocks.

Video transcript

- We want to keep it on the markets and bring in our next guest, Bob Doll, Crossmark Global Investment Chief Investment Officer. Mr. Doll, thank you so much for stopping by. I think I have to start with just asking for your reaction to all of the volatility that we're seeing in the markets today. And big banks, we also sort of wrapping up their earnings season. What do you make of the earnings that we've seen so far? And then what do you think we should be looking out for in earnings as they roll out?

BOB DOLL: Well, let me start at the back end. Earnings growth and good earnings are necessary to buffett the headwinds coming from depressing valuations on the back of rising rates and rising inflation. So far, the earnings have been pretty good, a little bit more mixed. We mentioned the banks, and there were some issues there as you know. But by and large, earnings are coming through reasonably well. Companies able to pass on some of the cost pressures through price increase. We need to see more of that repeat counter the headwinds from valuations.

ALEXIS CHRISTOFOROUS: Yeah, one of those companies was Procter & Gamble. We had the new CEO on earlier talking about how, for at least for now, consumers are willing to pay those higher prices. When do you think that's going to be a real problem for the economic recovery? When is it going to be too much for folks to pay these higher prices? And what will the impact be on companies bottom lines?

BOB DOLL: Yeah, if we get or when we get to that point, that won't be great news for the stock markets because the market is depending on these good earnings profiles. I will say, if you go back to even the release of the third quarter earnings three months ago, I was surprised how many companies actually pass along their cost pressures through higher prices. So, so far, it's not been a problem at all. I think there's more of that to go. Remember, consumers have $2 trillion plus of excess savings in their pockets. So they may be less price sensitive in these days than we think.

- I was surprised as well that they're able to drive up prices. And people for, right now, are paying for them. But some point, you sort of see that that's going to shift and change. I want to turn your attention to the bond market and ask you what is going on. We saw the 10-year stuck below 1.5. Suddenly, it hit one point. But now, today, touching 1.9 before retreating a little bit. On the front end, the two-year crossing, 1%. What is this telling us about what investors are feeling? And how many hikes do you think are coming this year?

BOB DOLL: So the rates haven't moved up more and quicker till now. It's been the surprise to me, not that we are. Remember, the Fed put in 0 Fed funds rate when we had an emergency. And I would make the case, that emergency has long since passed. And of course, we had that period where the Fed tried to convince us that inflation was transitory. Thankfully, they've abandoned that work because it's not all transitory. And therefore, we need higher rates across the curve as the Fed seeks to begin the normalization process.

The Fed moved from fighting unemployment to fighting inflation almost overnight, which is pretty unusual and pretty rare. But I think they've come to the conclusion they are behind the curve. And so you're right. Three months ago, we would debate, is the Fed going to raise rates in 2022 or not? Now, the debate is at three, or four, or five, will the first one be 25? Might it be 50 basis points?

But the trend is certainly higher. And if you're a bond investor, you've got to remember when rates go up, bond prices go down. The pace at which that happens is very debatable. My guess is it's three or four this year and probably, all 25s no 50s.

ALEXIS CHRISTOFOROUS: We know that volatility remains at a high level, that so-called fear gauge. The VIX index, last I checked, up about a percent, now topping 22. Where are the opportunities for investors in a volatile market? And how can you either take advantage of that or protect the portfolio?

BOB DOLL: Yeah. So I'd say a few things. One, if you have money that is earmarked for the market, wait for pullbacks. Don't chase it. Conversely, if you need to take money out, don't panic into the lows. Wait for some green days. I think we're going to get some of both. My view for the full year is that the more cyclical side of the market will do best-- financials and energy. My hesitation to say that short term is they're so far ahead and perhaps a bit overbought and may need to take a bit of a pause.

So I wouldn't go chase those financial and energy stocks. Wait for a pullback. But that's where the action is. That's where the cheapness is. We need in a higher interest rate inflation world to peel back a bit on our very high PE growth stocks that depend on very low interest rates.

- Bob, I hear from my producers that you are a great prognosticator. So what are some of your other predictions for 2022?

BOB DOLL: Well, you see, you've got a few of them up there. Let me highlight just a few. Inflation, that's the real investment question for this year. Our guess is that, ironically, inflation will fall during the course of this year. But don't be mesmerized by that. Core inflation is likely to remain above 3%, not going back to 1% to 2% where we've lived before.

For the stock market, our view coming into the year was we're not going to realize the consensus view that stocks go up with earnings because of the valuation headwind. So I think it's going to be a more frustrating year, hard to make money. There's a chance, especially if the dollar weaken, some of the international stocks do a bit better.

ALEXIS CHRISTOFOROUS: And what are you doing with commodities right now? Which we know are inflationary, they continue to go up, including energy. We're going to talk a little bit more about these high energy prices in a moment. But what are you playing in in that space, if anything? And are you using anything there as an inflation hedge?

BOB DOLL: Well, so the inflation hedges are, in fact, the two sectors I mentioned. Let's spend a second on energy. We know it's a supply and demand determine price. And we have a globe that's doing reasonably well. So demand is picking up. And supply, some places, it's kind of curtailed. Some for political reasons. So if you have limited supply and increasing demand, you know what happens to price. It goes up. And that's what we're seeing.

- All right. We will have to leave it there. Bob Doll, Crossmark Global Investment Chief Investment Officer, thanks for stopping by today.