BlackRock's Bob Doll: "Long Term Path of Least Resistance for Stocks Continues To Be Up"

By Dian L. Chu, Economic Forecasts & Opinions

Bob Doll, Vice Chairman of BlackRock (BLK) appeared at CNBC on March 29 sharing his latest views with Ken Langone. 

BlackRock (BLK) became the largest money manager in the world last December after acquiring Barclays Global Investors, and now has about $3.35 trillion asset under management.

Doll's Macro Views

• The pace of global economic recovery will be slower than normal due to the lingering credit problem 
• Credit conditions are improving
• Inflation is expected to remain tame as deflationary pressures have not vanished
• Employment will be the most widely watched key economic variable
• Job shedding phase seems to be have ended 
• Job growth could be right around the corner as many companies have been discussing increasing employment 
• Corporations are ramping up merger and acquisition activity  
• The real GDP is likely to turn from recovery into expansion maybe in the Q2, but more likely in Q3

Housing & Auto - Check Back in 3-5 Years
Meanwhile, Langone is of a more pessimistic view citing profits at Home Depot, though improving, is till 30% down from pre-crisis, and the grim outlook of the housing and autos sectors.  (Langone is a financial backer of Home Depot.)

While Doll agrees with Langone that it could take 3 to 5 years for housing and auto to fully recover, he thinks exports and business capital expenditure should continue to do well, and consumer spending should also continue the current uptrend.

Equity Risk Factors
Doll thinks in the current low interest and low inflation environment, earnings should continue to improve, but he also cautions that equity markets continue to face some downside risk:

• Money supply - Growth has been very weak, consistent with a lack of credit demand and availability
• Interest rate - A surge above a 4% yield for the 10-year Treasury would "present problems." On the other hand, lingering weakness in credit markets and the absence of inflationary threats should prevent the Fed from prematurely raising rates.
• A serious shift toward trade protectionism would be a negative for the economy and bearish for risk assets.

Short-term Technically Stretched
Investors are concerned about premature policy tightening, but recent stock price run-up has caused sentiment to become overly bullish.

Doll thinks in the short-term, there is a possibility that stocks may have been overpriced, as some technical indicators are looking stretched.  Nevertheless, he says,

"On balance, we expect that stocks will see double-digit gains at some point in 2010, but we foresee a slow grind upward rather than a continued powerful advance."

BlackRock Is Buying ...
Doll said BlackRock's current strategy remains largely based on market fundamentals and is looking at industrial and consumer cyclicals, and defensive high quality names.

He also mentioned health care bill should benefit the health sector. The technology sector is gaining market share worldwide. Emerging markets and the U.S. are showing strong signs of growth with Europe and Japan lagging somewhat. 

My Take - Downside Risk Aplenty
No economies can stage a meaningful recovery without the backing of a healthy financial and housing market. Housing is the single largest component of the U.S. economy and its positive and negative impacts reach into every market sector. 

We know housing is pretty much out of the growth equation as agreed upon by the two gurus in the clip; however, with commercial real estate lurking as the next implosion, one really cannot put that much faith in the financial sector either.

In addition, the U.S. is still a long way off replacing the 8.4 million jobs erased in the Great Recession and more than 11 million people are drawing unemployment insurance benefits.

On that note, stocks most likely have gotten ahead of themselves near term as indicated in my last post, I am also skeptical there's sufficient top-line growth to propel the U.S. stocks into "double digit gains" in 2010 as predicted by Doll.

So, from a portfolio allocation standpoint, developing economies would seem to be better bets than the U.S. for now.  

Note: Complete market commentary by Doll is available at BlackRock web site.

Quote Du Jour:

"I’m not going to hang my hat on recovery on housing and autos." ~ Bob Doll

Video Source: CNBC

By Dian L. Chu, Economic Forecasts & Opinions