The following is a weekly investment commentary by Bob Doll, vice chairman and chief equity strategist for fundamental equities at BlackRock Inc.
Last week was a difficult one for equity markets as ratings downgrades on European sovereign bonds raised fears of credit contagion. For the week, the Dow Jones Industrial Average lost 1.8% to close at 11,009, the S&P 500 Index declined 2.5% to 1,187 and the Nasdaq Composite fell 2.7% to 2,461.
Last week brought news that US gross domestic product (GDP) had grown at an estimated 3.2% pace in the first quarter, indicating that the US economy continues to recover at a moderate pace. While some sectors (such as consumer spending, business investment, equipment and software, and inventories) are providing strong momentum, other variables (including private nonresidential construction, international trade and state and local government spending) are acting as a drag. In all, the report confirms our view that the economy is transitioning from a government-aided recovery to a self-sustaining expansion. The key factor remains growth in private sector jobs, and we expect to see moderate growth in this area over the course of the year. Looking ahead, second-quarter GDP growth would have to come in at 4.5% for the US economy to get back to its 2008 peak. Such strong growth is unlikely and, therefore, we expect the economy to transition into expansion in the third quarter.
Also in the news last week was the Federal Reserve’s policy meeting, in which the central bank maintained its position on interest rates and left the accompanying commentary mostly unchanged. Attention is increasingly turning to when and how the Fed will move from its current emergency stance. As we have been saying for some time, we expect the Fed will begin signaling an increase in rates before too long, with higher rates likely by the end of the year.
Corporate earnings continue to be strong, with many companies beating expectations. At this point, it appears first-quarter earnings on the S&P 500 will be slightly above $20 per share. The improvements in earnings are a reflection both of cost cutting and increases in revenues. At this point, it looks like full-year 2010 earnings could come in somewhere between $85 and $90 per share, just shy of the peak of $92.
Spreads on Greek and other sovereign debt in Europe rose to new highs last week. The broader question for investors is whether the events in Europe signal a disruption in the global economic recovery and an end to the bull market in risk assets. Our answer to this question is “no,” and we expect that the coordinated and comprehensive IMF and EU packages should alleviate at least some of the issues.
Before last week, the rapid ascent in equity prices had been a cause for concern and, as last week’s downturn shows, markets remain vulnerable to corrective forces. To date, the problems of the sovereign debt crisis, global policy tightening and regulatory restrictions have been outweighed by the broader improvements in the global economy and rising corporate profits. Given the low returns offered by cash and the still-reasonable valuations for stocks, we expect that this trend will continue.
Bob Doll is vice chairman and chief equity strategist for Fundamental Equities at BlackRock, a 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.
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