'There's a chance this won't be a horrible recession': Strategist

Crossmark Global Investments CIO Bob Doll sits down with Yahoo Finance Live to assess the market's stability after weeks of volatility, inflation, recession concerns, and economic indicators coming from the housing market.

Video transcript

- Well, let's get more on that market action for you with our guest, Bob Doll, Crossmark Global Investments Chief Investment officer. Thank you for joining us. So as we mentioned, they're just days away from the end of the second quarter. What should we read into what we're seeing in the markets right now?

BOB DOLL: I think we're experiencing the aftereffects of an oversold condition. This is the third one we've seen this bear market. The first two lead to almost a 10% and more than 10% increase. This one is up 7 from the low, we're stalling a little today, digesting what we've experienced. But the fundamentals in the last week are-- you know, maybe inflation's peaking a bit. Maybe the economy is slowing and we're in this good news is bad news and bad news is good news for the stock market. I think we'll see more of the same.

- Hey, Bob, what are you looking at that suggests to you that inflation may be cooling or maybe we have seen a peak, when it comes to prices?

BOB DOLL: Well, obviously, the major indices or indicators have not shown us that. But I'm talking about the fall off last week in commodity prices. Copper is a key bellwether there. I think it will show that the second quarter was the peak in inflation. We may be solving some, not all, not even a majority, of the supply chain problems. And the boyle can come off there. The comparisons get easier from a year-over-year basis. So I think we'll see some decline to still unacceptable levels of inflation, but no longer the 8%, 9% that we've seen of late.

- And I want to ask you about a market-- I want to ask you about a market sentiment indicator that you mentioned in your notes there, the bull-bear ratio. What is that telling you? And how are you using it?

BOB DOLL: It tells us that there are a lot of scared people out there, a lot of bears, and not too many people who are excited about things. And that's usually when the sentiment measures get extreme in either direction. It pays to lean in the other direction. So it is among the reasons we think that this bear market rally is not yet over.

- Hey, Bob, getting back to what you were just saying a minute ago here, what's necessary to get back to the Fed's 2% inflation target? Do we need to see a recession? Do we need to see the labor market, maybe, weaken a bit in order to see the inflation drop that significantly?

BOB DOLL: Yeah, I think a miracle it's gonna take to get back to 2% inflation. Look, I think that things I'm talking about at the Edge and help some help from the Fed, we can get back to 4% or 5% inflation. But I don't see us getting to 2 without a recession, and that probably comes next year.

- And as we keep an eye, we're seeing the oil prices climbing again, the VIX edging upwards, as well. What does that tell us about where the market is headed? And how should people be positioning their portfolios?

BOB DOLL: Yeah, I think what it's telling us is the market will continue to be volatile, but maybe not exclusively to the downside, like we saw in the first half. I think we're gonna have a second half that's frustrating the bulls and frustrating the bears, bouncing around a bunch as we kind of digest the economy slowing. How much of an effect does that have on earnings? Maybe we get a little better inflation news so the PE ratio doesn't get threatened as much. But we're moving from a period where it's all been about PEs multiples declining. And we're moving to a period where I think the earnings are gonna be watched more carefully than the PE.

- Bob, you mentioned the high chance of a recession next year. How bad do you see that recession potentially getting?

BOB DOLL: You know, great question, I wish I had an honest answer. The honest answer, I do have one, is I don't know. But my guess is there's a chance this won't be a horrible recession. We still have a consumer that's in pretty good shape, a corporate sector cash, cash flow. And, as you all know, the labor market is incredibly strong. We've never entered a recession with the labor market being strong. So I'm hoping those three things can cushion us from what could be a more nasty recession.

- And I want to ask you about the 72 companies that have issued negative guidance for Q3, the highest number since the fourth quarter in 2019. What are you watching in terms of earnings?

BOB DOLL: I think that this next 30, maybe, 60 days, the reported earnings and the outlook going forward. Don't forget, during this period where the market's gone down, can I say, the limit, and people have been concerned, and worried, and the recession word keeps coming up. Earnings estimates have moved higher during that entire period. Earnings estimates for the S&P 500 today are 6% or 7% higher than they were on January 1st. So to your point about the earnings disappointments, the downgrades, I suspect there's more of that to come. We're gonna have to watch where does that show up, how much can corporations defend their profit margins.

Corporate America, so far, has done an amazing job raising prices to take care of cost pressures around labor, and manufacturing, and transportation. And our guess is that that won't be so easy going forward.

- Hey, Bob, what do you make of the housing market? We just got pending home sales out this morning. They posted a surprise increase in May. We've seen kind of a mixed bag when it comes to recent economic data. But specifically looking at the housing sector, I guess, where do you place that now and anything in there that is a worrisome sign to you?

BOB DOLL: Yeah. The rise in rates, while still not at horrendous levels absolutely, they're up a ton. And I think that has already begun to put some pressure on parts of the housing market. We still have a fair amount of demand, activity is slowing. So eventually, I think we'll have some price declines in real estate that goes with those higher interest rates and a slowing economy. But, boy, it's been very strong to date.

- And then, as we look at indicators, what's the next piece of economic data that you're keeping an eye on that will really help us track whether or not inflation ha peaked and what the markets are pricing in right now?

BOB DOLL: Yeah. I think it's the CPI, the PPI, the PCE, the traditional measures. But the lead indicators to that tend, often, to be those commodity prices that I referenced earlier. If I was only to watch one thing for inflation, price of copper. We call it Dr. Copper, as you know.

- Bob Doll, always great to have you here on the program, Crossmark Global Investments. Thanks so much for joining us.