BlackRock's Doll: Economy Will Plod As Markets Surge in 2011
January 10, 2011
NEW YORK-The U.S. economy will muddle through even as domestic stocks rake in double-digit percentage returns for the third straight year, said Robert C. Doll, the chief equity strategist for fundamental equities at BlackRock, in a breakfast briefing in New York Tuesday.
The good news for this year, Doll said, is that consumer and investor confidence levels will improve, the growth outlook will accelerate, and deflationary credit risks will shrink.
But he is cautiously optimistic.
"We are still in a fractured, difficult, credit-problem world. If we were in a normalized world, we would have even higher growth," he said. "Before we get carried away, this will still be a below-normal recovery."
This year, Doll predicts U.S. growth will accelerate as U.S. real GDP reaches a new all-time high. As opposed to relying on government stimulus to increase demand, there will be real demand, which is healthier and more sustainable. This can be seen as consumers continued to spend money over the holidays.
At the same time, the U.S. economy will create two to three million jobs, according to Doll, as unemployment falls to 9%.
Meanwhile, 2011 will see improvements in risk assets and equities as the U.S. economy continues to grow.
"By the close of 2011, the S&P 500 Index will be at 1,350-plus, a target that implies that the market will appreciate at least in line with corporate earnings," Doll said. The S&P 500 Index finished 2010 at 1,257, an increase of over 15% from a year earlier.
Doll's equity market expectations for this year are similar to 2010, the noticeable difference being that he expects more market risk in the new year. He predicts stocks will outperform cash and bonds.
"Stocks pulled ahead of bonds in 2010's fourth quarter, and we expect that trend to continue in 2011," he said. "Interest rate risk will be to the upside, given accelerating economic and job growth, the revival of business capital investment, the likelihood that bonds inflows will slow, and fading deflation fears."
On the interest rate front, Doll sees the accelerating economy, resumption of job growth, and revival of business investment as a case for higher interest rates.
In 2011, Doll expects the United States to outperform the MSCI World Index, a significant turnaround given that the U.S. competed with Japan for last place on the index for the last decade. He predicts that the United States, Germany and Brazil will outperform Japan, Spain and China, with the U.S. performance marked by the improving quantity and quality of growth, increasing confidence and accelerating job growth.
At the same time, U.S. corporations will remain strong. Strong balance sheets and free cash flow will lead to significant increases in dividends, share buybacks, mergers and acquisitions and business reinvestment.
But much can still go wrong, Doll warned, including credit problems, commodity price increases, inflation fears, a greater than expected rise in interest rates and currency and capital flow concerns leading to protectionist trade wars.
Doll also worries that the strength of the market return since August may mean the equity markets have bounced back too quickly. "I do have a concern that the exceptionally strong returns we have seen over the last couple of months may mean we 'borrowed' some of 2011's returns in late 2010," Doll said. "The upside possibilities could lead to stock market appreciation of 10% to 20% more than we expect. The downside issues could result in low double-digit percentage loss."
Keefe, Bruyette & Woods, on the other hand, predicts slow growth in the United States in 2011 in its "2011 Asset Managers Outlook Compilation: From Capital Accumulation to Capital Deployment," Keefe, Bruyette & Woods predicts that capital redeployment will focus on increased dividends, share repurchases, and mergers and acquisitions. Yet lending and growth opportunities for financials will be limited by the slow U.S. economic recovery due to lower consumer demand. In fact, KBW forecasts that GDP will grow slightly less than 2% in 2011, the unemployment rate will fall to 9.1% by the end of the year, and Americans will continue saving at high rates into 2012.
Meanwhile, the firm anticipates the Federal Reserve will maintain low interest rates in 2011, which will stimulate increased bank reserves and increased risk taking. With interest rates so low, KBW predicts domestic equity fund flows should begin to improve. The firm expects fixed income flows to remain on the up and up, although lower than their 2010 levels. By the spring, the Fed's policies will bear some fruit, KBW said, with capital markets activity increasing as well as demand for troubled assets.
Return on equity should improve, KBW said, as large financial institutions deploy capital and look for opportunities for global regulatory arbitrage. The strongest area for growth in 2011 will be capital markets, while the weakest will be bank loan balances.
At the same time, regulations will pressure the industry with the implementation of the Dodd-Frank bill.
The good news is that better equity flows and potential for additional operating leverage should mean robust growth for asset managers in 2011. KBW thinks alternative managers may be particularly well positioned for continued organic growth.
Ruthie Ackerman writes for American Banker.