The following is a weekly investment commentary by Bob Doll, vice chairman and chief equity strategist for fundamental equities at BlackRock Inc.
Last week marked the third consecutive up week for stocks, with the Dow Jones Industrial Average climbing 1.1% to 10,742, the S&P 500 Index advancing 0.9% to 1,160 and the Nasdaq Composite rising 0.3% to 2,374.
The Federal Reserve held its regularly scheduled meeting last week and, as anticipated, did not change any of its key policy language. Looking ahead, we anticipate that the central bank will need to see more clear evidence of a sustained recovery (chiefly positive employment growth) before it will consider changing course. This is particularly true given that inflation pressures have remained muted. Given the amount of excess capacity in the economy, we expect inflation to remain tame.
As we have been discussing for some time, the key economic variable that most are watching is the employment picture. From our perspective, we believe the jobsshedding phase appears to have ended, although new jobs are still not being created. We are optimistic that this scenario will change in March. Decreases in unemployment claims, one of the strongest leading indicators of payrolls, have accelerated in recent weeks. We have also seen increases in temporary employment levels and many companies have been discussing plans for increasing permanent employment as well. We are forecasting that payrolls may increase in the six-figure range for the current month. Factoring in the hiring of census workers, we would not be surprised to see that number top the 200,000 mark. Once jobs growth does commence in earnest, we also expect to see corporate earnings estimates increase for next year and investor uncertainty levels diminish. As such, we believe employment growth will be the key factor in terms of driving the next phase of the current cyclical bull market in equities.
Equity markets do continue to face some risks. In addition to the prevailing economic uncertainty, investors are concerned about the prospects of premature policy tightening in markets around the world, including China. Meanwhile, credit-related problems such as those surrounding Greece's debt remind us that deflationary pressures have not vanished. Many are also concerned about the Fed's strategy for exiting its current accommodative stance, although we think that even when the Fed does begin to raise rates, it will take quite some time before short-term rates move into restrictive territory. Additionally, state and local governments remain under pressure and concerns about the effects of protectionist trade policies present some risks. Finally, in the short term, the recent run-up in stock prices has caused sentiment and some technical factors to become stretched.
On balance, however, we continue to believe that the positive factors outweigh the negatives. Credit conditions are improving, we expect employment to increase, the Fed remains accommodative, inflation threats are absent and corporations are ramping up merger and acquisition activity. In all, we expect a prevailing equity friendly environment will help stock prices continue to rise over the long term.
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