by Bob Doll, Chief Equity Strategist, Fundamental Equities, BlackRock
Stocks fell last week amid a great deal of economic crosscurrents. Overall, the Dow Jones Industrial Average dropped 1.3% to 12,639, the S&P 500 Index fell 1.7% to 1,340 and the Nasdaq Composite declined 1.6% to 2,828.
The major story in the headlines is, of course, the death of Osama bin Laden. While the news can be viewed as beneficial from an overall perspective of improving the mood of the general public (which could have a positive impact on investor confidence), it is unlikely to have any meaningful impact on the economic or financial outlook. In our view, issues such as corporate earnings trends and economic data releases are almost certain to overshadow the impact of bin Ladenâs death.
Recent economic data does suggest that the United States is in the midst of a soft patch. The slowdown in gross domestic product (GDP) growth that we saw in the first quarter is the most high-profile data set that supports this view, and we have also seen a reduction in some individual and consumer confidence measures. To some extent, weaker economic data can be attributed to poor weather in much of the United States, but the real culprit is probably higher energy prices (notwithstanding last weekâs commodities correction). Higher energy prices are likely to have a longer-lasting negative impact on future growth levels unless we see a continuation of last weekâs moves.
Outside of the United States, investors are concerned about ongoing problems in European sovereign debt markets. Without decent levels of economic growth in European peripheral countries, we are likely to see higher levels of sovereign bond defaults. Unfortunately, the combination of fiscal austerity and policy tightening in Europe is unlikely to result in improved growth, meaning that the sovereign debt problem is not likely to go away any time soon.
Despite all of the risks and a somewhat weaker set of economic data, it is important to point out that there are also a number of tailwinds for the economy and the markets. Chief among them is the continued improvement in the labor markets. Aprilâs employment report showed a significantly better-than-expected increase of 244,000 jobs for the month. The unemployment level also rose to 9.0%, but at least some of that was driven by a decline in agriculture-related jobs that were negatively impacted by bad weather. The recent trend of employment growth is quite impressive. Over the last three months, the average increase in jobs has been 253,000, which would translate into an annual increase of three million new jobs, the best rate in over five years. Looking ahead, we expect the labor market improvements will continue.
An additional positive factor we would highlight is the continued improvement in credit conditions in the United States. Loan standards have been easing in recent months for both businesses and individuals, which is a leading indicator of improvements in jobs growth, retail sales and corporate investments. Additionally, as we have been citing in recent weeks, corporate earnings have continued to be a source of strength.
Despite the economic crosscurrents, our baseline view has not changed. We still believe the macro environment will continue to be dominated by moderate levels of economic growth (helped in large part by an improving labor market), low levels of core inflation (driven by below-potential levels of GDP growth and employment) and near-0% short-term interest rates. There are, of course, a number of risks that could cause more significant disruptions (specifically, a worsening in economic data and/or continued climbs in energy prices). For now, however, we believe that, as has been the case for many months, the macro environment should be conducive for additional gains in equity prices.
About Bob Doll
Bob Doll is Chief Equity Strategist for Fundamental Equities at BlackRockÂź 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 May 9, 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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