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Post: The Tell: Oil prices are the ‘linchpin’ for markets as Russia wages war on Ukraine, says CIO Bob Doll

For stock market investors, a lot may be riding on oil prices as the Russia-Ukraine war persists, according to Bob Doll, chief investment officer of Crossmark Global Investments.

“Oil prices, I think, are the linchpin and link to where markets are going, where inflation is going and how people should be positioned,” Doll said in a phone interview Thursday. “That’s the big question.”

For now, Doll, who previously filled the role of chief equity strategist at Nuveen and BlackRock, is sticking to his forecast for the S&P 500 to finish the year at 4,500. At the start of 2022 that forecast seemed bearish to some, said Doll, who explained that he’d been concerned about stretched equity valuations against the backdrop of high inflation and expectations for rates to climb this year.

Doll said he still feels “comfortable” with his U.S. stock-market forecast, assuming the war remains contained to Ukraine and soaring oil prices don’t see “a big spike.” In his view, “$100 oil won’t create a recession” this year, but crude prices “will have a lot to say about” whether the U.S. winds up in a stagflationary environment.

West Texas Intermediate Crude for April delivery

rose nearly 8.4% Thursday to settle at $102.98 a barrel, with prices surging during Russia’s invasion of Ukraine. Crude had settled as high as $123.70 on March 8 to mark the highest finish since Aug. 1, 2008, according to Dow Jones Market Data.

See: Oil suffers ‘spectacular’ collapse, enters bear market just 5 days after settling at nearly 14-year highs

U.S. stock benchmarks rose sharply Thursday, with the S&P 500

climbing 1.2% to close at 4,411.67 for its third straight daily gain. Still, the stock market has been volatile this year, with the S&P 500 down 7.4% through Thursday, after finishing 2021 at about 4,766, according to FactSet data.

Lately, Doll said he’s been trimming energy exposure on “the big up days” and adding to financials on “the big down days.” The S&P 500’s energy sector

has surged around 32% this year, far outperforming the broader stock market index.

“My clients like it when I take a profit from time to time,” said Doll. “I’m not selling out of energy, I’m just trimming back.”

Doll said he tends to prefer value over growth equities in the current environment, though not as much as at the start of this year because of the already large outperformance of value stocks. “My guess is half of the value vs. growth advantage has been taken out of the market,” he said.

The Russell 1000 Value Index

is down more than 2% so far this year, faring better than the 13% drop of the Russell 1000 Growth Index
FactSet data show.

Doll’s bet on buying financials on recent down days is tied to the idea that banks should do well in a “decent economy” and rising interest rate environment. “It would help if the yield curve steepened a bit for financials, but higher rates help,” he said.

Read: Treasury yield curve risks inverting relatively early after start of Fed rate hike cycle, warns Deutsche Bank

The Fed announced Wednesday that it was lifting its benchmark interest rate 25 basis points, from near zero, to battle soaring inflation and will continue on a path of rate hikes this year.

Doll doesn’t view the Fed as being all that hawkish, though.

“What the Fed is telling the market is, ‘we’re way behind the curve and we’re going to take our time catching up,’” said Doll, referring to his takeaway from the central bank’s policy decision that was announced Wednesday after the conclusion of its two-day meeting.

Fed officials expect the central bank will lift its benchmark rate six more times this year, with a median projection for rates to rise to 2.8% in 2023. Meanwhile, the consumer-price index has measured U.S. inflation at a 40-year high of 7.9%.

Read: What’s next for stocks after Fed rate hike sends markets on a wild ride

The Fed delivered no big surprises to the market, but it’s a confusing time for investors because of the unpredictability of the war in Ukraine, according to Doll. He said the war adds to inflation in the U.S. while weighing on its economic growth.

While the U.S. has banned Russian oil because of its attack on Ukraine, such a move would be tougher for Europe because of its reliance on energy supplies from Russia, said Doll. He said Europe would risk falling into a recession if it banned oil imports from Russia, which is “a big price to pay.”

Meanwhile, investors have been buying on “rumors” of potential progress toward resolving the war in Ukraine, and then selling as “cold water” is poured on those hopes, according to Doll.

“Uncertainty is so high,” he said. “It’s really hard to know where the consensus is” in markets.

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