by Bob Doll, Chief Equity Strategist, Fundamental Equities, BlackRock
Stocks again experienced mixed results last week as markets remain stuck in neutral. Last week, the Dow Jones Industrial Average lost 0.6% to 11,935, the S&P 500 Index was down 0.2% to 1,268 and the Nasdaq Composite rallied 1.4% to 2,653. As we have been saying for several weeks now, while we are expecting to see additional volatility, we view the current period of weakness as a potential buying opportunity.
The Federal Reserve held its regularly scheduled policy meeting last week and, to no one’s surprise, elected to keep interest rates on hold. The accompanying statement and Fed Chairman Ben Bernanke’s follow-on news conference made it clear that the central bank has downgraded its assessment of US economic growth. The Fed did, however, underscore that the factors causing the weakness were mostly temporary, in particular highlighting higher fuel and food prices and disruptions from the natural disasters in Japan earlier this year. Looking ahead, we are not expecting to see any near-term changes in the Fed’s position. We think there is virtually no chance of additional quantitative easing measures (i.e., we will not see a QE3). Conversely, given a slow recovery and a subdued inflation outlook we are not expecting to see higher interest rates until at least mid-2012.
Oil prices were also in the news last week, given the International Energy Agency’s announcement that it would be releasing up to 60 million barrels of oil from strategic reserves over the coming month. At roughly 2 million barrels per day, this amount should more than offset the shortfall from lost Libyan production, albeit only for a month. The announcement came as a surprise to the markets and resulted in a sharp downtick in oil prices, but we are not expecting this downtrend to be long-lasting. The amount of oil being released is not enough to change the medium- or longer-term outlook for prices, which should remain dependent on such factors as demand levels and geopolitical risks.
An additional item that garnered its share of headlines last week was the stalled debate in Washington over the debt ceiling. At present, Democrats and Republicans have been unable to move the debate forward, with Republicans remaining adamant in their stance that for every dollar the debt ceiling is raised, an equal amount of spending must be cut. The GOP is also insisting that any discussion of potential tax increases remain off the table. It really is not much of a surprise that the talks are getting bogged down. As we saw with the earlier debate over a potential government shutdown, there is a great deal of gamesmanship and political theater associated with these issues and, ultimately, we expect some sort of compromise to be reached. In our view, there is virtually no chance that the gridlock reaches a point that could cause an actual default on US Treasury debt. Even if Congress is unable to reach a short- or long-term agreement by the current deadline of August 2, the government would have a number of options. The Treasury department still has the flexibility to prioritize other spending to remain current on debt payments and policymakers could even elect to enact some sort of partial government shutdown rather than default.
As has been the case for many weeks now, conviction levels are low among investors, which have resulted in a modest, but prolonged, correction in stock prices. The macro environment of slow-but-positive growth, low inflation and easy monetary policy remains conducive to higher equity prices, but investors are unable or unwilling to look past near-term risks and as a result, the “risk on/risk off” trade remains dominant. The question, then, is what it will take to get the markets back on track. Corporate earnings have been strong, and we are approaching the beginning of the second-quarter earnings season, but expectations have drifted lower due to weakness in the financial sector. Clarity around the endgame of the European sovereign debt crisis would certainly help, but that does not appear to be forthcoming any time soon. Ultimately, we are expecting to see better news concerning the US economy and are calling for a reacceleration in growth in the second half of 2011. Should that happen, it should reassure investors that the global recovery will persist, which should help stock prices to again move higher.
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 June 27, 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.
