Thursday, 29 September 2016
Last updated 4 hours ago
Jul 11 2007 | 12:00pm ET
Though the U.S. economy will grow at a below-trend pace in 2007 and the equity markets will remain volatile, stock prices should still end the year higher than their current levels, according to Robert Doll, vice chairman and global chief investment officer of equities at BlackRock.
"We are maintaining a reasonably constructive outlook for the equity markets for 2007–with 'constructive' signaling an up year, but 'reasonably' suggesting performance will not be as good as last year, and with more angst and volatility along the way," Doll said in his annual mid-year update and outlook for the economy and financial markets.
Interest Rates Stay Put
Doll notes that climbing long-term bond yields, along with ongoing concerns about inflation, have resulted in a consensus view that there is now close to no chance that the Federal Reserve will lower interest rates this year. He anticipates that U.S. inflation will remain low, but periodic worries about inflation will surface due to strong world growth, the commodity boom and a weaker dollar.
"For our part, while we continue to believe that the Fed's next move will be to lower interest rates, it does appear less and less likely that that move will come anytime soon," he said. "We nevertheless are still holding out hope that weaker growth and low inflation may prompt the central bank to act before the year is out."
Housing Still a Drag on the Economy
The ongoing housing recession is still the primary drag on economic growth, Doll said. "Consumer credit levels have been deteriorating and both commercial and residential delinquency rates have been moving up, which suggests to us that housing market weakness still may have some way to go.”
The meltdown in the sub-prime mortgage market will not trigger a recession or systemic financial shock, he said, but it will lengthen the housing downturn. At the same time, higher long-term interest rates will exacerbate the problems in the housing market.
On the other hand, however, several factors are countering the recessionary impact of the slowing housing market, including continuing employment growth and increases in average hourly earnings, which are bolstering consumer-spending levels. "Exports continue to boom, higher growth levels outside the U.S. are providing stimulus and business investment has shown signs of improvement," he said.
According to Doll, second-quarter U.S. GDP growth is expected to come in above 3%, which would erase some of the weakness from the first quarter. Overall, global real economic growth should be in the 4% to 4.5% range in 2007, compared with 2 to 2.5% in the U.S.
"The trend speaks strongly to the case for global investing. More and more – and particularly in the U.S. – investors need to be diligent about looking beyond their own borders for the market's most attractive growth opportunities," he said.
"The underlying message to investors is to be realistic. Recognize that we're in a lower return/higher volatility environment, where the tailwinds of the bull market are not as strong as before. It's an environment where skillful security selection will remain paramount."