by Bob Doll, Chief Equity Strategist, Fundamental Equities, BlackRock
Following the previous week’s declines that were largely driven by the turmoil in Egypt, equity markets resumed their winning ways last week thanks to some better-than-expected economic and earnings reports. The Dow Jones Industrial Average climbed 2.3% to 12,092, the S&P 500 Index rose 2.7% to 1,310 and the Nasdaq Composite advanced 3.1% to 2,769.
Regarding the turmoil in Egypt, other than the sharp downturn in equity markets that occurred on Friday, January 28, there has not been much of an impact on financial markets. Obviously, the situation in Egypt remains volatile and unpredictable, but at this point, we do not see much likelihood of contagion and believe that, from an investment standpoint, this is more “noise” than a substantive risk.
In economic news, last week saw the release of the January labor market report, and it was certainly one of the more confusing reports we have seen in some time. Payrolls grew by a meager 36,000 jobs, but the unemployment rate experienced its second consecutive sharp drop, falling from 9.4% to 9.0%. At the same time, hours worked fell slightly while wages grew. Combined with the December data, the two-month gap between changes in payrolls and changes in unemployment is one of the widest in history, and seems to be a reflection of the significant snowstorms that gripped much of the country over the past month and skewed the data. If we do not get another massive snowstorm in the current month, we are expecting to see significant employment gains for February (perhaps as many as 200,000 jobs gained) as well as upward revisions for prior months. We also expect to see some sort of reversal in the sharp fall of the unemployment rate. Our overall view of the labor market remains cautiously optimistic—we are continuing to expect to see improvements in the coming months and we are inclined to dismiss last week’s headline numbers as being weather-related.
The Federal Reserve held its regularly scheduled policy meeting last week, and while the Fed did not signal any near-term change in monetary policy, we are likely at a point where the launch of new stimulative policy measures are at an end (i.e., we are unlikely to see a round of “QE3”). Over the last couple of years, the Fed has been highly aggressive in terms of cutting rates and adopting new quantitative easing measures, and given the pickup in economic growth over the last several months and higher oil, food and other commodity prices, at some point, the central bank will have to turn its attention to maintaining price stability. We are not expecting to see a shift toward policy tightening at any point soon, but it does appear to be on the horizon.
The fourth-quarter earnings season is drawing to a close, and the results have been strong. Approximately 70% of companies surpassed expectations on top-line growth, 60% beat expectations on the bottom line and more than 50% beat on both, the first time that has occurred in quite a long time. The results suggest that companies are achieving their results not just by cost-cutting, but also by boosting revenues, a positive indicator for future results. At this point, it appears that corporate earnings will hit new record highs this year—analyst expectations are for S&P 500 earnings per share to reach $95 or $96 for all of 2011.
Although we continue to expect to see some hiccups along the way, improving economic growth and corporate earnings point the way toward a continuation of the equity bull market. We are in the midst of the first global economic recovery that is being led by emerging economies, and the United States is only at the beginning of transitioning into a self-sustaining expansion, suggesting that economic improvements still have a way to go. As the economy improves, we are beginning to see equity market correlations fall—stock prices are being driven more by fundamentals and less by macro factors, a trend that we expect will continue, meaning that security selection is growing more important.
About Bob Doll
Bob Doll is Chief Equity Strategist for Fundamental Equities at BlackRock® 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 February 7, 2011, 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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