The combination of easy monetary policy, further injections of quantitative easing and high deficits have led many to worry about the prospects for inflation. This has been an ongoing debate for several years at this point, and we have long held the view that inflation measures are in the midst of a long-term bottoming process. We still believe that deflation is a more present risk, but acknowledge that the environment will eventually be moving to the other side of that risk spectrum. We are not forecasting any sort of hyperinflation, but we do expect the pendulum to begin swinging back to a more inflationary environment.
Equity markets have come a long way over the past couple of months and for the year as a whole have been able to grind higher despite high volatility and some significant setbacks along the way. Our view is that markets will continue to muddle through. The global economy remains weak, but the recovery is still on track. We are expecting the labor market to gradually continue to improve over the coming months, which should help the economy regain sounder footing.
The valuations and earnings backdrop also suggests that stocks should be headed higher. Equity markets have returned to the highs they reached in April, but since that time, earnings growth has remained quite strong. This means that, based on price-to-earnings comparisons, stocks are more attractively valued now than they were eight months ago. Additionally, since that time, Treasury yields have moved significantly lower and cash continues to return essentially 0%. To us, this means that stocks are still positioned to outperform cash and Treasuries over the coming months and years.
About Bob Doll
Bob Doll is Chief Equity Strategist for Fundamental Equities at BlackRockÂŽ a premier provider of global investment management, risk management and advisory services. Mr. Doll is also Lead Portfolio Manager of BlackRock's Large Cap Series Funds. Prior to joining the firm, Mr. Doll was President and Chief Investment Officer at Merrill Lynch Investment Managers.
Sources: BlackRock; Bank Credit Analyst. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 8, 2010, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
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