Target Stocks in 4 Sectors in 2022

  • The great inflation debate is nearing an end, and it seems like the Federal Reserve lost.
  • Pricing pressures haven’t yet proven to be transitory, as the US central bank predicted.
  • The CIO of Crossmark Global Investments says four sectors are set up to thrive anyway in 2022.

Fierce debates have raged for months over whether pricing pressures would be temporary or long-lasting, though they’ve since cooled down as inflation heats up. Even the

Federal Reserve

, which insisted throughout the year that inflation was “transitory,” is now starting to backtrack

Bob Doll, the CIO of Houston-based Crossmark Global Investments, which manages about $5.9 billion in assets, is one of the winners of the great inflation debate. He told Insider in a recent interview that his concern about prices arose last spring and grew over the summer.

Inflation would be “problematic,” Doll wrote in a September note, adding that he was “not convinced” by the Fed’s transitory narrative. His thesis was simple, though — as Fed Chairman Jerome Powell can attest — it wasn’t obvious to everyone.

“There’s too much money chasing too few goods,” Doll told Insider. “When the Fed drops money out of B-52 bombers, when Congress spends trillions of dollars, that’s a lot of money. And that has put so much money in people’s pockets, and now they can’t spend it because they can’t find the thing they want, and then that’s been exacerbated by the supply shortage thing. So it’s a series of things that have made the picture more complicated.”

After mistakes, the Fed is tempting FAIT

Powell’s admission Tuesday that red-hot inflation is causing the Fed to consider a faster tapering of bond purchases shocked the investing world. The comments were the Fed chair’s attempt to get back ahead of the inflation curve after being overly complacent, Doll said.

“He’s trying to dig out of the hole he’s dug for himself to try to prevent a miscalculation and an error, but I think it’s going to be kind of tough,” Doll said. “Some might argue with inflation having been nice and quiet at 1% to 2%, and now at 5.6%, ‘Of course the Fed has already made a mistake.’ But it’s easy to throw stones from the sidelines.”

Critics continue to slam the Fed for being too dismissive of inflation, but Doll credits Powell for correctly noting that some pricing pressures are, in fact, transitory. Mismatches between supply and demand, which caused crippling supply-chain issues and price spikes, will eventually dissipate, Doll said, though the timing is impossible to forecast.

What the Fed has failed to acknowledge is that core inflation, including wage growth, will persist well past the pandemic, Doll said. The investment chief added that the era of inflation sitting between 0% to 2%, which the US enjoyed for much of the past decade, “is over” — even as the rate of price growth inevitably slows in 2022. Inflation in the 2% to 4% range is the new normal, Doll said.

The Fed may have lost the inflation argument for now, but it has the luxury of bending the rules in its favor. Through a new framework called Flexible Average Inflation Targeting (FAIT), the Fed can allow inflation to run above its long-term target of 2% for a while, so long as it eventually reverts to that level. Doll is skeptical that the Fed can pull off the high-wire act outlined in FAIT.

“Be careful what you wish for,” Doll said. “They wanted to get it up to 2%. They didn’t want it to get to 5.6%. Moving the dials as the Fed does is not a precise science. And so, you push and you push and you push, and all of a sudden now we’re dealing with inflation of 5.6%.”

Inflation investing strategy for 2022

Though inflation is a threat to some stocks, investors should refrain from bailing on risk assets and raising cash, which will inevitably see its value erode. 

Robust economic expansion and record earnings growth are good reasons to be bullish, Doll said, even as gains moderate and the Omicron variant emerges as a threat. In that environment, value stocks that aren’t reliant on future earnings are best set up for success, Doll said.

Four value-oriented sectors are strong bets, in Doll’s view: Financials, Energy, Materials, and Industrials.

All are highly correlated with economic activity, as an uptick in loans improves bank profitability, greater demand for oil and steel lifts energy and materials companies, respectively, and more construction keeps firms in the industrials sector busy.

But financials stand out and should be the first sector investors target, Doll said. He wrote about the group at length in September and said nothing has changed. Doll’s thesis for the sector is as follows: 

“Financials are likely to perform well in the coming years should inflation move higher, since the relative performance of the US financial sector has correlated with 10-year Treasury yields over the past decade. Strong growth, rising inflation, and higher inflation expectations will lift long-term bond yields and a steeper yield curve augurs well for banks’ net interest margins. Higher bond yields will likely lift sentiment towards the sector and foster a re-rating from currently depressed relative valuations.”

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