• Bob Doll says a recession is still in store for the US economy. 
  • The inverted yield curve and The Conference Board's LEI are two indicators that inform his view.
  • Doll sees the S&P 500 falling to somewhere between 3,800-4,200 — as much as 15%.

As the US economy continues to prevail through a hawkish Federal Reserve regime, market observers are getting more cheery about the prospect of a soft-landing outcome where a recession is avoided altogether. 

The recent optimism is perhaps best visible in two of Wall Street's biggest economists — Bank of America's Michael Gapen and JPMorgan's Michael Feroli — taking back their recession calls earlier this month. It's also visible in the S&P 500's 16.8% rally so far year-to-date.

But Bob Doll, the CIO at Crossmark Global Investments and a former chief US equity strategist at BlackRock, thinks investors aren't being patient enough. He told Insider on Thursday that he's sticking with his call for a downturn in the months ahead. 

"We said at the beginning of the year we expected a mild recession to begin sometime between labor day and the end of the year, and we're still there," Doll said.

"No question the word recession has left a lot of people's vocabulary," he continued, adding, "I'm stubborn and I'm still using the word recession in my vocabulary."

For Doll, it's a matter of looking at leading indicators, and not ones that are lagging or coincident. For example, people cite low unemployment and still-positive monthly job gains as evidence that the economy is intact. But jobs numbers are backward looking, he said, or at best reflect current circumstances. 

Instead, investors should be paying attention to indicators like the Treasury yield curve, The Conference Board's Leading Economic Index, and money growth.

Here's the yield curve. Inversions of the 3-month bill and 10-year note have preceded every recession since the 1960s. This is a reflection of shorter-duration yields rising alongside the fed funds rate, and investors seeking safety in the 1o-year. 

yield curve
Federal Reserve Bank of St. Louis

And then there's The Conference Board's Leading Economic Index. The index compiles 10 components, including manufacturing activity, consumer sentiment, housing market activity, bond market activity, stock market performance, unemployment claims, and lending activity. It's been in recession territory for months now, signaling a downturn could be imminent.

lei
The Conference Board

And here's year-over-year growth of the money supply. It's now negative for the first time ever as the Fed allows assets to roll off of its balance sheet by not replacing them when they mature. Negative money growth means shrinking liquidity in the economy, which slows it down. 

money supply m2 growth
Federal Reserve Bank of St. Louis

Investors should also be wary of policy lags, Doll said, as rate hikes still work their way into the economy. 

"17 months ago is when the Fed started raising rates. And the start of a recession typically comes a bunch of of months after the yield curve inverts. The yield curve didn't invert until less than a year ago. So all of it tells me, not so fast with just abandoning a recession," he said. 

"The Fed raised rates from 0% to 5.25% in a little over a year. That's pretty heavy stuff. And to think that the only consequence is that a couple banks go under in the middle of March for about a day and a half, and then we move on our merry way, I think is a little naive," Doll added.

While Doll does see a downturn coming, he believes it will be mild considering the monetary and fiscal stimuli over the last few years.

He therefore sees stocks selling off only mildly as well. His expectation is for the S&P 500 to fall to a range between 3,800-4,200, though he said the index could go lower. At Friday's closing price near 4,464, a sell-off to 3,800 would represent 14.8% downside. 

The bigger picture

Doll isn't the only strategist on Wall Street digging in their heels on their recession call despite the economy's strength.

Rosenberg Research's David Rosenberg and Piper Sandler's Michael Kantrowitz are adamant that a downturn lies ahead, with both citing many of the same indicators that Doll is looking at. Firms like Wells Fargo and Deutsche Bank also believe a recession is still on the way.

As far as stock market calls go, Doll's assessment for the S&P 500 to fall to a 3,800-4,200 range is slightly more bearish than average but still fairly within the mainstream. Among 24 major Wall Street strategists, their median year-end price target is 4,300, while the average is 4,225, according to data compiled by Bloomberg. The lowest target is BNP Paribas' Greg Boutle at 3,400, and the highest is Fundstrat's Tom Lee at 4,825.

To get a better sense of where the economy is headed in the months ahead, it's worth looking at the individual components of the The Conference Board's LEI, shown in the second chart above. Like the broader index indicates, many of the components suggest economic slowing ahead.

For example, according to the Institute for Supply Management's Purchasing Manager's Index, manufacturing activity is contracting.

ism pmi
Institute for Supply Management

Lending standards are also exceptionally tight — at levels seen during prior recessions — meaning businesses could start having a tough time when it comes to expanding or keeping their lights on.

lending standards
Federal Reserve Bank of St. Louis

But as of now, bulls reign supreme as the labor market remains intact. Last week, the Bureau of Labor Statistics said the unemployment rate fell back to 3.5% from 3.7% as the economy added 187,000 jobs. 

In the months ahead, this is arguably the indicator that will have to withstand the Fed's hawkishness the most if stocks have any hope of continuing their rally.