What Asset Allocation Now? (Bob Doll and David Darst)

Two top investment pros. BlackRock’s Chief Equity Strategist and respected mutual fund manager, Bob Doll, and Morgan Stanley’s Chief Investment Strategist and asset allocation master, David Darst will discuss where to diversify your portfolios globally.

Consuelo Mack WealthTrack - June 17, 2011

CONSUELO MACK: This week on WealthTrack, two top investment pros defy the naysayers and present the positive case for the U.S. economy and markets. BlackRock’s Chief Equity Strategist and respected fund manager Bob Doll and Morgan Stanley’s Chief Investment Strategist and asset allocation master David Darst take on the pessimists, next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. The stock market is famously known to climb a wall of worry, but in recent weeks a wall of worries has dragged the markets down to one of the longest losing streaks of the last ten years. The list of woes grew again this week. Industrial production figures for May showed almost no growth for the second month in a row. Retail sales for the month weakened as consumers cut spending for the first time in 11 months. Confidence among homebuilders fell to the lowest level since last September. But housing starts surprised on the upside, as home building jumped in the west as other parts of the country languished. Some economists are now lowering their estimates of GDP growth for the second quarter from 3 to two percent. That after the first quarter came in at an anemic 1.8%, following better than 3% growth in the final three months of last year.

A major concern is the health of the American consumer who accounts for about 70% of economic activity. Continuing high unemployment, falling home prices and high oil prices have taken their toll. Oil is off its highs but the outlook for jobs and housing remains weak.

Meanwhile, the high stakes political battle over raising the federal debt ceiling, so the Treasury can borrow money and the government can pay its bills, is coming down to the wire. The deadline for an agreement is August 2nd with no compromise yet in sight.

Overseas the prospects of a default in Greece has added to concerns about Europe’s financial stability, while powerhouse emerging markets such as China and Brazil are putting on the brakes to fight domestic inflation.

How serious is the global slowdown we are experiencing? It depends upon whom you talk to. We decided to consult two top investment strategists for their take. Both are familiar faces to WealthTrack viewers. Bob Doll is BlackRock’s Chief Equity Strategist and a respected fund manager who runs three large-cap mutual funds- BlackRock Large Cap Value, Growth and Core. David Darst is Morgan Stanley’s Chief Investment Strategist, a celebrated master of asset allocation and author of several excellent books on the subject. In an interview earlier this week, I asked them how nervous they are about the economy.

BOB DOLL: Well, I’d feel better if things were getting stronger rather than weaker. There’s no question about that, Consuelo, but we know economies never go in a straight line. We had a slowdown last summer, and we all got a little jittery, but at the end of the day, that was ill-founded, and we came back to a reasonable rate of growth. I think the same thing will happen here. The debate is how much of the slowdown is related to temporary things like Japan and the supply line disruptions, China and its slowdown, some unusual weather in the U.S., and how much is related to things that are going to last longer, a slowdown in demand. That’s the debate, and we don’t know the answer to that question yet, but as sure as we’re talking here, I think things will turn around in the second half and do a little bit better. We’re not going to set any records. We haven’t so far this cycle, and unfortunately when you slow down from a slow number, it’s a little too close to zero for comfort, so people get jittery.


DAVID DARST: The Federal Reserve, Consuelo, as you know, back on June the 9th reported their Beige Book survey of the 12 Federal Reserve regions. Four indicated they were slowing mainly in the Northeast, in the Mid Atlantic. One is increasing, that’s Dallas, and seven of them indicated that they look like they’re holding steady gains. So we are of the belief automobile production will pick up in the second half pretty strongly. We expect the trade component of the United States GDP to kick in very strongly in the fourth quarter. By the way this thing works, most of your trade effect does happen in the fourth quarter, so Morgan Stanley’s economists have shaved their full year estimates somewhat, but they think the second half will resume a reasonably robust growth of about 3.6% annualized for the third quarter, and for the fourth quarter, 4.3%.

CONSUELO MACK: Whoa. Where’s the growth coming from? I mean, this is a consumer economy.

DAVID DARST: The fourth quarter is one and a half-- One and a half points of the 4.3 is this trade effect, the export contribution. For us to be really worried, we would want to see valuations stretched. They don’t seem stretched right now.

CONSUELO MACK: In the stock markets.

DAVID DARST: In the stock market. The market’s trading for about 14 times next year’s earnings. Earnings are holding up pretty well. They actually, many of the analysts, are raising their estimates. We would want to see too much investor euphoria.

CONSUELO MACK: Right, in the markets, right. In the stock market again, right.

DAVID DARST: In individual investor mentality and psychology, and finally, the Federal Reserve raising interest rates, we don’t see that. We see right now that they’re actually going to push it out into late 2012 for their first raise, and so interest rates are very, very stimulative. For that reason, we agree with Bob Doll. We do not see this being much more than a slowdown, but people are worried. Confidence, housing, jobs.

CONSUELO MACK: Employment.


CONSUELO MACK: Right, so I mean, this is, you know, all of your points well taken but this is a consumer-driven economy. Consumers are still de-leveraging. I mean, they’re borrowing a little bit more, so I mean, what do you do about the fact that 70% of the economy is still not robust? Manufacturing is, corporations are, but the consumer is not.

BOB DOLL: Consumer’s not robust, but the consumer is participating in the economic recovery, and as David has articulated, neither of us are looking for strong growth, because in part the consumer is retrenching and paying down some debt, but we got all hung up on the most recent monthly jobs report. I think a lot of people have forgotten the three prior to it which were as strong as we’ve seen in months and months and months, and so when you look at a three-month moving average, I still think you get we’re doing better. We’re not going to set any records, but we’re improving, and I think there’s just so much skittishness out there, every bad number gets accentuated in the marketplace, and the good ones are kind of forgotten about, and that’s usually a good time to invest.

DAVID DARST: There’s a swing factor to it, but corporations are basically sitting on tons and tons of cash. You’ve talked about it many weeks on your show, $1.4 trillion on their balance sheet, about 7% of their total assets. It’s near the all-time record. They need to put this to work. We’ve seen the Fed play the monetary card. We’ve seen the administration and the Congress play the fiscal card and still we haven’t got that jobs. We think the card that must be played is the structural reform card, and the worse things get, the more people are going to concentrate on the fact that no President has ever been re-elected when unemployment is above 7.4% and it’s right now 9.1%, Consuelo. The next job report is July the 8th, not July 1st. The first Friday in July; because of technical reasons, it will be reported the 8th of July. So you want to see those numbers as Bob Doll just said, 150,000 or more. That’s a very important number for your viewers to look for as the July 8th number.

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