The Markets January 10, 2022

Learned Lessons and Market Musings From CIO Bob Doll

The Crossmark investment leader expects 2022 to be more challenging for investors, as central banks unwind supportive policies in response to the ongoing economic recovery and macroeconomic conditions drive higher inflation.
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During a webinar hosted by Bob Doll discussing his annual top 10 predictions for the year, the Crossmark Global Investments chief investment officer (CIO) noted that this year’s theme is a “tug of war between a good earnings tailwind and a modest valuation headwind,” which he says points to a difficult year ahead with more frequent pullbacks and higher volatility.

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Doll said he expects 2022 to be more challenging for investors as the Federal Reserve and other central banks progressively unwind accommodative policies in response to the ongoing economic recovery and elevated inflation readings. While he says he expects solid economic and earnings growth will be a tailwind for equities, rising interest rates and stubborn inflation will be headwinds, likely creating volatility.

Despite a positive earnings picture, Doll says, the overall macro backdrop will become less favorable for the equity market in 2022. The Fed’s recent tapering announcement marks the beginning of a shift toward a less accommodative monetary policy stance—a situation likely to be complemented by reduced fiscal stimulus, he added.

The following is a summary of Doll’s 10 predictions for 2022.

  1. U.S. real growth and inflation remain above-trend but decline from 2021 levels.

Doll’s discussion: “2021 was gargantuan. Real gross domestic product (GDP) was up 5.5%, and, of course, we don’t have the final number, but we will come in somewhere in that zone, most likely, depending on the fourth quarter. If it’s anywhere close to that, that’d be the strongest U.S. economy since 1984.

“We expect quite good growth in 2022, call it 4%, but noticeably slower than 2021, and a modest downtick in inflation, which we think is a bit of a confusing sign.

“Economic growth this year, as I just stated, in our view will be above trend, but it’s slowing. The economy is still reopening, but it’s not uniform. It’s bumpy. We still have the tailwinds, have massive monetary and fiscal stimulus, but we’re past our peak.”

  1. Inflation falls, but core inflation remains stuck at around 3%.

Doll’s discussion: “Inflation is as high as it’s been in nearly 40 years, so most people don’t remember anything but low inflation. And yet we think the inflation rate is nothing like we’ve seen in other periods in our history, even for many of us old folks remembering the 1970s, where gasoline and oil price inflation infected the whole system.

“The Fed obviously is part of that story. And our argument is the Fed has finally, belatedly, moved from fighting unemployment to fighting inflation. Again, if you believe inflation was transitory then we wouldn’t even worry about it so much, but if you’ve come to the view that it’s not totally transitory, you got to get on the stick.

“We think that that 2022 is going to be confusing for inflation. We think it will fall because some of the transitory factors will disappear. Some of the supply shortage problems will get solved. But our point is that core bedrock of structural inflation is not going back to the 1% to 2% level; it’s going to be between 3% and 4%.”

  1. For the first time since 1958-59, 10-year Treasurys provide a second consecutive year of negative returns.

Doll’s discussion: “2021 and 2022 are likely to be the first back-to-back years where you lose money in a 10-year Treasury bond since 1958 and 1959. We have a series of conditions that tell us that interest rates will creep higher, hopefully not at the pace we’ve seen so far in the early part of this year. But if 10-year Treasury yields move up this year by the same amount they moved up last year, we’ll have a 10-year Treasury at the end of this year at 209 basis points (bps).

“The Fed, every cycle, if you remember or study economic and market cycle history, always moves from our best friend to our worst enemy. The time frame between the two is always different and hard to speculate, but that’s the discussion that goes on. There are various signs of the Fed taking the punch bowl away, to use another common phrase.”

  1. Stocks experience their first 10% correction since the pandemic and fail to make the gains widely expected.

Doll’s discussion: “The consensus is basically saying ‘earnings grow and that’s how much stocks will be up this year.’ We do not have anything to quibble with regarding earnings, and we think earnings will be robust this year.

“Like our analysis on the economy, we’ve got the puts and the takes for the stock market. The first positive is an important one, i.e., no recession. We do not see a recession and without a recession, it is hard to envision a big, sustained move down in the stock market. We can have a noticeable smack, but we recover if there is no recession, because in the long run, earnings do move stocks. The inflation rate falling this year is another good sign, but be careful, because we don’t think the market made much of an adjustment for the fact the inflation rate has moved higher.

“On the negative side is valuation levels. Now, you can complain about that for a long period of time and in the short run valuation really doesn’t matter much, but over the intermediate and longer term, it is the driver to where stock prices go. Again, like No. 3, the Fed is taking away the punch bowl. The big tailwind to the stock market over the last, I’m going to call, a decade has been easy policy, zero interest rates.”

  1. Cyclical, value and small stocks outperform defensive, growth and large stocks.

Doll’s discussion: “We’ve had a long period of time, for example, where growth has beaten value, and if you look at that one in particular, you can see value stocks are very cheap compared with growth stocks. You do not often see this dichotomy at this magnitude.

“As I said earlier, the valuation of something like a stock does not alone indicate where it’s going, it just means that when it goes in a new direction, it’s likely to have further to travel, and we’ve seen that at the beginning of the year.”

  1. Financials and energy outperform utilities and communication services.

Doll’s discussion: “Financials are our favorite sector. They’re pretty cheap, the stocks, in our view. It is the area where the analysts have the most bearish earnings expectations this year. We think they’re being too cautious. If interest rates move higher and the economy’s OK, financials will tend to do very well.

“When it comes to energy, obviously, the sector tore it up last year. We think they’ll do well again this year, as we see, in terms of supply and demand, an imbalance. Supply is curtailed partly for political reasons, and demand, with the improving economy, is pretty robust, so the path of least resistance for prices of oil and gas has been higher.

“Here’s another interesting way to look at industries and sectors: Analyses show that, when interest rates rise, certain sectors traditionally outperform and underperform. The outperformers tend to be the more cyclical areas, sectors such as financials, materials, industrials and energy, and the ones that don’t do so well tend to be far more defensive stocks, things such as consumer staples and utilities.”

  1. International stocks outperform the U.S. for only the second year in the past decade.

Doll’s discussion: “It’s amazing by magnitude and the number of years that the U.S. has outperformed the rest of the world. We’re not urging people to run out and sell all their domestic stocks and buy a bunch of international stocks. We’re just saying if you’ve been fortunate enough to be primarily invested in the U.S., stand up and take a bow, and then do some dollar-cost averaging slowly but surely.

“The U.S. is the most defensive stock market in the world, so in slow growth environments, the U.S. tends to outperform, but in other conditions such as those we see emerging, international stocks tend to do better. When rates rise, the U.S. tends to lag.

“Another wild card, to get this one right or wrong, could be the need for some dollar weakness. The dollar has remained pretty strong over the past couple of years. Our guess is that, with a defensiveness of the world slowly dissipating, as people begin to realize it’s safe to come out from under the covers and go do some shopping, that we will see pressure on the U.S. currency.”

  1. Values-based investing continues to gain share.

Doll’s discussion: “People are saying they want to line up their investments with their values. This goes by all kinds of names—environmental, social and governance (ESG) investing or socially responsible investing (SRI) or others—depending about what kind of person you’re talking to.

“The way to implement this is to figure out what companies are doing harm, according to your values, and avoid them. On the other hand, figure out which companies are doing good and embrace and own those. Then, where appropriate, engage with other companies to figure out where they are, where they’re going and maybe help them realize what some of these issues are.

“This is an area that has been growing, we think it will continue to grow.”

  1. After a 60-plus year low in 2021, the federal interest expense, as a percentage of revenue, begins a long-term move higher.

Doll’s discussion: “It’s not just the amount of debt, it’s the interest rate on the debt. And over the past decade or so, until recently, interest rates have fallen faster than the debt has gone up, such that interest expense has fallen as a percentage of revenue. Our point is that the tailwind is over and we’re going to go back up the other side, hopefully for not too many years. We’re going to be in this pickle for quite some time. There is no free lunch. When you borrow money, you are borrowing from the future.”

  1. Republicans gain at least 20 to 25 House seats and barely win the Senate.

Doll’s discussion: “The 10th prediction is always a political prediction because politics affects investments. The U.S. has undergone the most political volatility and, a lot of years, the party in power has been removed seven of the last eight elections, and our guess is that will happen. The Democrats will lose both houses of Congress and the Republicans will have it, and then the mark will be on their head to produce, otherwise, they’ll be kicked out of office.

“How does all this affect the markets? We’ve looked carefully at midterm election years and we have the following observations. For starters, since the S&P 500 was created in the 1920s, 73% of the years the market has gone up. So, about a quarter of the time, it goes down. But, if you only look at every fourth year, i.e., the midterm election year, only 62% of the time has the market gone up. And then, if you further look at those years, and only look at the subset of the first term of a president, growth occurred only 44% of the time. In other words, more than half the time it’s gone down.

“The biggest decline is in the second year, which is the midterm election year we’re in now. I hope these patterns don’t repeat themselves, but they’re worth pointing out. The good news is, post the midterm election, since 1950, the next 12 months has always gone up. Let’s hope this one is repeated.”

Practice Management January 5, 2022

Tips for Sourcing Diverse Talent in 2022

According to one advisory firm leader who has had success creating a diverse and dynamic team, anyone who says there is a lack of diverse and talented people seeking success in financial services is not making a sufficient effort to find them.
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In her capacity as the founder and CEO of Financial Freedom Wealth Management Group, Julia Carlson says she has learned some important lessons about what it takes to build a diverse and talented team of financial advisers and support staff.

In pursuing this undertaking, Carlson tells PLANADVISER, she draws on her own personal experience entering the financial services industry in the late 1990s.

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“My background is pretty different from the typical adviser out there, as I actually came into this industry without getting a college degree,” Carlson says. “After graduating from high school, I moved to a small town in Oregon and thought, ‘OK, what am I going to do to support myself?’ I went to work for a local bank and it happened to have an investment department, and it really intrigued me. Something about the role really clicked for me, perhaps because my family has always been very open and proactive about talking about money.”

Embracing the idea of becoming a successful financial adviser, Carlson got fully securities licensed before she could legally drink alcohol—again, with no college degree in finance or business.

“That entry into the industry has given me a very useful perspective when it comes to sourcing talent,” Carlson says.

Eventually, Carlson left the bank to strike out on her own as an individual adviser and, to start, she built her practice entirely as a solo practitioner.

“I initially did everything alone, for quite a while, actually, but eventually I knew I was basically becoming a bottleneck for the growth of my firm,” Carlson recalls. “I started by hiring an assistant to help with scheduling and paperwork and those things, and eventually I hired three assistants in total. And then I discovered that I needed another adviser on board. My first collaborations with other advisers were mixed in terms of success. I did things like work with people with whom I would split commissions—it wasn’t a true employee relationship. Honestly a lot of those early partnerships didn’t work out. I had probably 10 or more partnership that didn’t succeed.”

What worked so much better for Carlson was moving to a pure employee model, where no single adviser can win at another’s expense.

“We are all helping our team, and every client we have is a client of the firm—not of one adviser,” Carlson says. “Creating this team approach created wonderful momentum, and it also really helped us create a diverse team. Having a team-first perspective, I believe, helps different types of people feel like they can have a place on our team. You don’t want to have people come in and feel like they are competing against each other; that’s not welcoming for anyone.”

It is challenging for even privileged people coming from wealthy and supportive backgrounds to thrive in an “eat-what-you-kill” environment, she says—let alone if they are coming from an underrepresented group or from a background where they do not have a real grounding in the financial services industry.

“In my experience, I think if you hire only for on-paper résumé experience, frankly, you are going to get the same old, traditional older male advisers coming in your door,” Carlson says. “Because of my own personal background, I have always been very willing to hire someone who has the right team attributes and a passion for serving clients, even if they don’t have all the experience. We also are successful because we proactively send a clear message about a career path and the investment we hope to make in our new talent.”

For example, Financial Freedom last year hired a young woman initially as a marketing professional. “Now she is already fully licensed, and she is soon going to be sitting for her CFP [Certified Financial Planner] exam,” Carlson says. “Her initial strength was in marketing, but after working with us, she really wanted to learn financial advising, and we helped her to achieve that.”

Where does she get the confidence to hire people without all the experience on paper?

“It comes from the fact that this was my journey,” Carlson says. “I don’t have a four-year college degree. I can’t even get a CFP certification because I don’t have a bachelor’s degree. But I did have the willingness to learn what I didn’t know. If I could do that, other people can do that.”

Carlson emphasizes that the diversity of her team is in no small part due to its employee ownership model.

“Looking at how you are compensating people and how you are organizing your team is such an important part of the diversity conversation,” she argues. “So is the messaging and image you are putting out in the world. I’ve frankly had a lot of conversations with that older, white, male adviser, where they say none of their applicants are diverse. So, I say to them, ‘Let’s look at your job ad and your website,’ and it becomes pretty clear to me why that is the case. The image they are putting out into the world is not working.”

Simply put, diversity attracts diversity, she explains.

“I can assure you, I have no problems finding applicants for our open positions who are diverse, because they feel like it is safe to come to our firm,” Carlson says. “And I also believe that we attract what we expect and hope to attract. If I don’t think I’m going to get diversity and I don’t make a true effort to achieve it, then it’s never going to happen. Your openness matters and your public perception matters. When your team knows that every voice at the table matters, and you empower your team, their voices can be heard, and that creates a culture where everyone is buying in. The more clearly you define and communicate and live core values that prize diversity, the more success you’re going to have.

Carlos Muñoz, head of asset manager diversity, equity and inclusion (DE&I) engagement at Morgan Stanley, agrees with Carlson’s perspective, noting that many of the same beliefs underpin the recent launch, led by Morgan Stanley, of the Equity Collective, a group of 25 firms that aims to reach out to young people.

Muñoz says a Mercer study concluded that Black and Latino students’ interest in working in financial services “crystallizes” during high school, while white students more often find an interest in the field during their college years. For that reason, the Equity Collective has established three key sponsorships to generate an interest in finance in young people of different ages—with the Boys & Girls Clubs of America, Team IMPACT and HIVE Diversity.

“I have lived this statistic firsthand,” Muñoz says. “It’s one of those things that, as a result of your upbringing or family circumstances, you might have to start thinking about what your career prospects are from a pretty early age. Part of the reason we are working on the Equity Collective is to address this concept and to work to, in a word, demystify the financial services industry, so diverse young people can understand that there are opportunities in this field that go well beyond just being a stockbroker.”

Muñoz says that, broadly speaking, whatever cultural or economic background a young person is from, they can benefit from having a better understanding of the opportunities that exist in financial services, and specifically the diversity of opportunities.

“We need to proactively communicate that this not just a sales industry. It’s a much richer and more dynamic field than many people realize,” Muñoz says. “Many students think about financial services as only being about investment bankers and portfolio managers. There is just so much in between—opportunities in marketing, legal, cybersecurity and more. If you have an interest or passion in something, you can very likely apply it within the financial services field and make a great career for yourself.”

Reflecting on what the financial services industry needs to become truly inclusive and diverse, Muñoz says it is going to take bold, sustained action.

“As an industry, we are going to have to be more intentional about our collaboration and the initiatives we are undertaking to help empower individuals and help more diverse talent find roles within this industry,” he says. “And we have to create opportunity for their advancement and success over the long term. With the Equity Collective, we are working with the three groups as a way to do this, really focusing on the education standpoint of what financial services is. We aren’t necessarily going to be focused on teaching these young people how to do the job of financial services—that comes later. This is about creating that interest and that spark in these young people and making them interested in financial services and helping them to see that they have a place in the industry.”

Muñoz and Carlson agree that no single firm can do this alone. The industry writ large needs to improve on its diversity and inclusion, they say, so it’s going to take an industry-wide approach to solve the issue.

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