Last week was a strong one for risk assets, and for equities in particular, with the broad US averages entering positive territory for the first time since early January. The Dow Jones Industrial Average gained 2.3% to close the week at 10,566, the S&P 500 Index advanced 3.1% to 1,139 and the Nasdaq Composite climbed 3.9% to 2,326. All sectors were positive, with the materials area up the most at 6%.
Friday brought the release of perhaps the most waited-for economic statistic, the employment report, which showed less than 36,000 jobs were lost in February. While the average work week fell, clearly tied to weather-related troubles in parts of the nation, the overall report was better than most people expected given the severe weather, with several signs that the job market will soon start to post good news. Globally, numerous countries are already reporting positive job growth. The US may well have joined this camp if not for the disruptions caused by the February snowstorms. In fact, we would argue that the second quarter could bring as many as 300,000 new jobs given that the average work week, temporary hiring, productivity and profits—four leading indicators of job growth—have all moved up.
Continuing with the good news, a profits-led recovery appears to be unfolding, which will lead to increases in capital expenditures and, eventually, in employment. In addition, credit markets in general have improved significantly, global short rates are still at lows, yield curves remain fairly steep, and parts of the world, notably emerging market economies, are growing rather nicely. The threats to the more optimistic view include premature policy tightening, unfinished deleveraging and protectionism. That said, the past few weeks have provided a number of signals that the major central banks recognize economic vulnerabilities and falling core inflation and, thus, are likely to remain on hold.
In our view, March 2009 marked the primary low for this bear market. We are a year past that now and, barring a significant double dip in the economy, the odds point to 2010 as a positive year for equities and other risk assets. Some argue that the recovery process is artificial, mainly reflecting the impact of government intervention, and that the economy's day of reckoning will come as stimulus is withdrawn. Skepticism about the durability of a recovery is common following recessions, especially after a severe one, but recent history suggests that the world economy almost always adapts and returns to growth. Minus any significant negative external shocks, we believe this recovery should follow suit.
Turning back to the markets, after six negative weeks, flows in equities have been positive for three weeks running. In our view, accommodative liquidity conditions, combined with a healing economy, continue to support a pro-growth investment stance. While this will be tempered by deleveraging and debt paydown, we would argue that a focus on risk assets, and especially equities, makes sense.
Bob Doll is vice chairman and chief equity strategist for Fundamental Equities at BlackRock, a premier provider of global investment management, risk management and advisory services. Mr. Doll also is a member of the BlackRock Leadership Committee and lead portfolio manager of BlackRock's Large Cap Series Funds. Prior to joining BlackRock, Mr. Doll was President and Chief Investment Officer of Merrill Lynch Investment Managers. BlackRock has $3.35 trillion in assets under management as of December 31, 2009.
