The following is a weekly investment commentary by Bob Doll, vice chairman and chief equity strategist for fundamental equities at BlackRock Inc.
Equities rallied for the first part of last week, reaching new highs for the current cycle on Thursday, before falling sharply on Friday on news that US regulators are suing Goldman Sachs over alleged fraud in connection with its collateralized debt obligation business. Stocks were mixed for the week, with the Dow Jones Industrial Average inching up 0.2% to 11,019, the S&P 500 Index declining 0.2% to 1,192 and the Nasdaq Composite rising 1.1% to 2,481.
Economic data continues to show that the recovery is proceeding stronger than most had expected, thanks in large part to the massive fiscal and monetary stimulus enacted around the world, which has sparked a recovery in growth even beyond some of the most optimistic projections.
When the recovery began, it was driven primarily by a rebound in manufactured goods and inventory levels, and while the manufacturing sector continues to be the source of greatest strength, the economic recovery has broadened to include other sectors as well.
Demand among both consumers and companies around the world has been rising, and consumer spending has been stronger than expected (although spending has been coming from savings, rather than from growth in incomes). These trends imply that production levels have not yet caught up with demand, which augers well for the ongoing boom in production.
There are some medium- and long-term headwinds to economic growth. Among the most notable are expanding deficits and the probability of higher tax rates, which will likely restrain growth at some point in the future, although these threats have not yet manifested themselves. From a geographic perspective, the strongest growth rates continue to come from the United States and Asia. Europe's economy has moved out of recession, but its recovery remains weak, as the region has been hampered by its inability to unify over plans to combat fiscal crises.
Corporate earnings have also continued to exhibit strength. The first batch of first-quarter earnings has shown that 81% of companies have beaten revenue expectations and 79% have exceeded earnings forecasts. These results have prompted consensus 2010 earnings projections to move higher.
Stocks have rallied in an almost uninterrupted fashion over the past couple of months, but the tenor of Friday's news adds an element of uncertainty. This backdrop, combined with various signs of excess in the markets, suggests that a period of profit-taking may be coming, perhaps sooner rather than later. In any case, however, the recovering economy, low inflation, strong corporate earnings and reasonable valuation levels should be enough to cause any sort of correction to be short-lived. We expect that stocks should continue to outperform Treasuries and cash over the course of the year and, barring some sort of policy mistake or surprise event, believe that the current bull market is likely to continue.
Bob Doll is vice chairman and chief equity strategist for Fundamental Equities at BlackRock Investments LLC. 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 the firm, Mr. Doll was president and chief investment officer of Merrill Lynch Investment Managers.
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