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Monday Market Calls
by Russ Koesterich of BlackRock,
As Europe continues to muddle along, much of the bad news has been discounted in with the exception of the banks, which are likely to continue to remain under pressure. S&P cut Portugal?s rating two notches as its parliament rejected the government?s new austerity measures, prompting Prime Minister Jose Socrates to resign. Meanwhile Moody?s downgraded 30 small Spanish banks with mostly negative outlook following the earlier sovereign debt rating downgrade. However, despite the banking issues, Spain has been able to continue financing its debts.
Equities on the Rise Despite Geopolitical Risks
Risk assets (and equities in particular) powered to a strong week of gains, with the Dow Jones Industrial Average climbing 3.1% to 12,221, the S&P 500 Index advancing 2.7% to 1,314 and the Nasdaq Composite rising 3.8% to 2,743. Although a number of near-term risks remain (particularly related to the unpredictability of escalating unrest in the Middle East), we maintain our view that equity markets are likely to continue their longterm trend of outperformance.
iShares Bi-Weekly Strategy Update
by Russ Koesterich of BlackRock,
Last week, world equity markets suffered their sharpest correction since August of 2010. Unrest in the Middle East and sovereign debt issues in Europe are contributing to the spike in volatility, but last week?s sell-off was primarily driven by the earthquake in Japan and related concerns over the safety of its nuclear power plants. The events in Japan are unlikely to detract from global growth, or change the market dynamics favoring equities. In fact given the recent flight to safety and accompanying drop in nominal bond yields, we reiterate our preference for equities over bonds.
Risks to the Global Economy Should Remain Contained
Escalating anxiety over the damage from the earthquake in Japan and resulting nuclear reactor problems as well as rising tensions in Libya and the Middle East resulted in an aggressive selloff in equity prices early last week. Despite an end-of-week rally, stocks were down for the week as a whole, with the Dow Jones Industrial Average falling 1.5% to 11,859, the S&P 500 Index declining 1.9% to 1,279 and the Nasdaq Composite losing 2.7% to 2,644. The events of the last several weeks serve as a reminder about how quickly potential risks can turn into downside reality.
Monday Market Calls
by Russ Koesterich of BlackRock,
Call #1: Underweight European equity market (with emphasis on banks) Call #2: Overweight developed (with preference for large/mega cap) vs. emerging markets. Year-to-date, emerging markets are down roughly 1.5% while developed market mega caps are up roughly 5%. Our view is reinforced by the recent market volatility and growing unrest in the Middle East. In this type of environment, large, quality companies are likely to prove more resilient.
Weekly Investment Commentary
Risk assets experienced a setback last week in the face of rising tensions in Libya and the Middle East. Additionally, the massive earthquake that hit Japan on Friday resulted in a sharp downturn in Japanese equities on Monday and increased investor unease. For the week, the Dow Jones Industrial Average lost 1.0% to 12,044, the S&P 500 Index declined 1.3% to 1,304 and the Nasdaq Composite fell 2.5% to 2,716. The human costs of the earthquake in Japan are obviously foremost in everyone?s mind at this time, but the potential economic and market implications are also being weighed by investors.
iShares Bi-Weekly Strategy Update Part 1
by Russ Koesterich of BlackRock,
The overall economy is demonstrating impressive resiliency to higher oil prices ? as evidenced by the recent strength in the ISM manufacturing and services surveys ? but investors should not be too complacent when it comes to the consumer sector. Even though labor markets are staging a slow-motion recovery, the US consumer still faces multiple headwinds, including anemic wage growth, too much debt, and a still fragile housing market. Oil crossing the $100 threshold will not help.
iShares Bi-Weekly Strategy Update Part 2
by Russ Koesterich of BlackRock,
Recently, silver prices have benefited more than gold from the economic rebound. The relative gap between gold and silver suggests that it may be time for a pause in silver?s run. One of the many ironies of markets last year was the extent to which inflation occupied investors? attention, despite its near universal absence. While inflation has recently accelerated in emerging markets and a few developed ones, inflation was and is still largely absent in the developed world. Yet, record low inflation did not stop investors from worrying about it.
Gold or Goldilocks?
by Kevin Feldman of BlackRock,
After a roller coaster January, gold prices have been soaring to nominal highs again of late. Given the recent rise in price, I thought this would be a good time to revisit the case for having a small amount of gold in your portfolio. Investors flocked to gold in 2009 and 2010 because of worldwide concern over the stability of the financial system, and as a result the precious metal?s price skyrocketed, passing $1400 an ounce. Last month, Barron?s warned its readers that the gold rush is over. Suggesting investors were likely to search for assets with greater expected returns than gold.
Investment Commentary
A tug of war is taking place in the markets, with crosscurrents of good economic reports on the positive side and a continued rise in oil prices from the conflicts in the Middle East on the negative side. Last week, US equities were up modestly, with the Dow Jones Industrial Average rising 0.33% to 12,169, the Nasdaq Composite advancing 0.13% to 2,784 and the S&P 500 adding 0.10% to close at 1,321.
Investment Commentary
Escalating turmoil in the Middle East and North Africa caused oil prices to spike higher last week and stock prices to fall. Oil prices went over the$100 a barrel mark and despite a late-week rally, stocks ended the week noticeably lower. In many ways, it could be argued that a stock market correction was overdue-before last week, the US stock market had gone 107 days before experiencing a peak-to-trough decline of 3.5%, a new record. Our long-term view is that while shortterm volatility is likely to persist, the growing geopolitical risks are unlikely to derail the global economic recovery.
Investment Commentary
The bearish view of the current rally is that it is liquidity-driven and based on artificial propping-up by overly easy monetary and fiscal policy support. While we agree that the stimulus from the Federal Reserve and other policy makers has been an important pillar in helping to restore economic growth and drive risk asset prices higher, we also believe that the economy is transitioning into a self-sustaining expansion. In our opinion, this environment of improving growth, low inflation and a supportive policy backdrop continues to represent a ?sweet spot? for risk assets.
Investment Commentary
For many investors, the shift into equity markets is still in the early stages and equity valuations are hardly stretched, suggesting that the upward moves have further to run. While pullbacks and corrections will no doubt occur along the way, we believe they should be short and shallow and should be taken advantage of to add to positions.
Investment Commentary
Although we expect some hiccups along the way, improving economic growth and corporate earnings point the way toward a continuation of the equity bull market. We are in the midst of the first global economic recovery that is being led by emerging economies, and the U.S. is only at the beginning of transitioning into a self-sustaining expansion, suggesting that economic improvements still have a way to go. As the economy improves, we are beginning to see equity market correlations fall ?stock prices are being driven more by fundamentals and less by macro factors, a trend we expect to continue.
Investment Commentary
At present, most investors appear to have increased their expectations for global growth and for growth levels in the United States. The words ?double dip? have virtually vanished from investors? vocabularies and while we agree with the generally optimistic tenor of the conversation, we are also somewhat uneasy about the positive shift in sentiment and growing sense of complacency. As last week?s events remind us, there are a number of risks to be wary of, including one we have not yet mentioned ? monetary tightening in emerging markets.
Investment Commentary
A number of factors bear close watching for investors, including the potential for additional Chinese policy tightening, ongoing weakness in the housing market and ongoing European sovereign debt issues. The overall strength of the economy, however, suggests to us that a repeat of the environment of fear that surfaced last year when the Greek sovereign debt problem developed is unlikely. We believe the strength in profit margins coupled with a less-hostile regulatory posture from D.C., should spur increased confidence, which should lead to a pickup in employment.
Investment Commentary
As we indicated earlier, we expect that the more bullish forces will prevail over the coming months, but we acknowledge that risks remain. The strong run-up we have seen since the August lows could mean that markets are overdue for a pullback, but should that occur, we would argue that any near-term weakness would be an opportunity for increasing equity positions since the cyclical backdrop is likely to remain equity-friendly.
Investment Commentary
We see a number of potential risks for the economy and the markets in the year ahead, including sovereign debt issues, emerging markets inflation and the possibility of higher tax rates, but we remain positive on the overall environment. Inflation should remain low throughout 2011, economic growth should accelerate slightly with the quality of that growth improving, and corporate earnings should remain strong an environment that should provide a solid backdrop for stocks to post further gains over the course of the year.
2011: A Look Ahead
As a way of discussing our economic and market views for the coming year, we present our 10 predictions for 2011: 1. US growth accelerates as US real GDP reaches a new all-time high. 2. The US economy creates two to three million jobs in 2011 as the unemployment rate falls to 9%. 3. US stocks experience a third year of double-digit percentage returns for the first time in more than a decade as earnings reach a new all-time high. 4. Stocks outperform bonds and cash. 5. The US stock market outperforms the MSCI World Index.
Weekly Investment Commentary
Recent economic data has continued to be generally positive, with highlights including some decent consumer spending figures. In addition to accelerating growth trends in the US, most areas of the world have also shown signs of economic improvement in recent weeks. The concern about the European debt situation has been relatively muted as of late, and while these issues will likely continue to surface into the New Year, the difference between the Greek debt crisis of a few months ago and what is happening today is that now the global economy as a whole appears to be on firmer footing.
Weekly Investment Commentary
We think it is important that the correlations among asset classes have continued to fall, an indicator that investors are beginning to seek value across different investment areas rather than all herding to the same investments and limiting profit potential. Even within equities, it seems that investors are demonstrating healthy behavior by becoming discriminating and breaking out of patterns. Investors seem to be moving away from responding to increased macro risks by selling and lessened risks by buying ? this is a positive development.
Weekly Investment Commentary
Downward pressure on the markets is coming from a number of sources, including geopolitical risk in the form of heightened conflict between North and South Korea, the deepening of the European debt crisis, policy tightening in China, an FBI-led investigation of insider trading, confusion over the implementation of quantitative easing and weakening housing market data. While we recognize that all of these issues represent downside risks for the market, we believe that stocks are in the
midst of a normal corrective phase and that the longer-term trend remains positive.
Weekly Investment Commentary
We believe that equity markets should continue to head unevenly higher over the next several months. Earnings expectations have been on an upward trend and the economic backdrop seems to be improving. Economic projections were weaker in the Apr to Aug period, stabilized in Sept and Oct and have since been moving higher. Our view is that global growth will continue to improve in 2011. There are a number of risks; ongoing sovereign debt issues, escalating inflation in China and the potential breakdown in global policy coordination, but our baseline scenario is for a continued cyclical recovery.
Weekly Investment Commentary
Last week?s market correction was, in many ways, somewhat overdue. Both stocks and commodities have experienced significant price appreciation and the US dollar had become oversold, so it should not be surprising to see some sort of reversal in these trends. The risks of a double dip recession are in the process of vanishing. As the recovery continues to move along, our outlook is that the trend of risk asset prices moving higher is likely to continue.
Weekly Investment Commentary
In our view, the strength of the GOP victory makes it quite likely that Congress will push
through some extension of the Bush-era tax cuts, which are set to expire at the end of 2010. We expect the Fed to continue to be aggressive in terms of combating deflation and promoting economic growth, at least until it sees a downturn in the unemployment rate. Deflation is a more present risk than inflation, but the environment will eventually be moving to the other side of that risk spectrum. The valuations and earnings backdrop also suggests that stocks should be headed higher.
Quantitative Easing Measures Likely to Help Economy
For the past couple of years, deflationary pressures and deleveraging risks have been front and center in the debate over the future direction of economic growth, and as the pending arrival of additional easing measures shows, these forces are still highly present. The worst of the deleveraging situation is now in the past, however, and the future growth impact of deleveraging will be less than it was over the past two years. The falling dollar higher commodity prices and the addition of more quantitative easing should prime the pump for inflationary pressures to begin increasing.
Market Rally Continues
Over the long term, modest levels of growth should be enough to allow corporate earnings to continue to make gains and push markets higher. However, because stock markets have advanced so strongly over the past several weeks (at least in part over expectations of additional easing), we may be looking at a classic 'buy the rumor, sell the news' scenario that could cause a near-term setback at some point later this year. In any case, the economic, earnings and valuation backdrop makes for an attractive longer-term case for equities.
Market Rally Contines
Over the long term, modest levels of growth should be enough to allow corporate earnings to continue to make gains and push markets higher. Because stock markets have advanced so strongly over the past several weeks, however, we may be looking at a classic 'buy the rumor, sell the news' scenario that could cause a near-term setback at some point later this year. In any case, the economic, earnings and valuation backdrop makes for an attractive longer-term case for equities.
Quantitative Easing Prospects Lift Stocks
Despite the fact that Treasury yields have moved lower in recent weeks, the Fed's actions will help reduce deflationary risks and will help global economic growth. Stock markets and commodity prices have been pricing in inflation; those markets have it right in that central banks will do what is necessary to fight deflationary forces. The intentions of central bankers are quite clear at present, and this appears to be a case where the old saying 'don't fight the Fed' seems prudent advice: From an investment perspective, risk assets should continue to grind higher.
Corporate Earnings Outlook Remains Strong
In the short term, continued caution is warranted given the high levels of uncertainty, especially considering the rebound in investor sentiment we have seen, coincident with equities rising 10 percent from their lows about a month ago. Still, assuming the United States does avoid a double-dip recession, and that Europe continues to avert a renewed financial crisis, investors with long-term horizons should look past the short-term tactical issues and focus on the fact that equity valuations appear attractive, especially relative to bonds.
Weekly Investment Commentary
The macroeconomic backdrop seems improved compared to one month ago. Economic data has moved from 'bad' to 'less bad' (if not to 'good'), and the rhetoric from Washington, D.C. has recently focused on some pro-business and tax policies. Optimism is growing that with the upcoming midterm elections, investors may be seeing some more equity-friendly policies in the works. BlackRock remains optimistic that the economy will avoid a double-dip recession, and stocks should continue to grind higher.
Weekly Investment Commentary
Absent any significant economic disappointments, stocks are likely to continue to make gains in the weeks ahead. Although investors have begun to re-enter the markets, however, most still have lower-than-normal levels of equity exposure in their portfolios and are waiting for clearer signs that the economy has regained strength before rebuilding their stock positions. Nonetheless, equity valuations are attractive and, looking ahead, stocks appear likely to outperform Treasury bonds and cash over a two- to three-year time horizon.
Weekly Investment Commentary
Last week saw a drop in jobless claims, a narrowing of the trade balance and an increase in wholesale inventories, all of which suggests that the economic recovery remains intact. Although market performance has improved slightly over the past couple of weeks, stocks remain in a trading range. Ultimately, stocks will break out of their current stalemate, either to the positive side or to the negative. BlackRock is in the former camp, but acknowledges that investors will need to see clearer evidence that the double-dip scenario will not emerge before that can happen.
Weekly Investment Commentary
Equity markets have been shaky in recent months, but the tightening of financial conditions that occurred in the spring and summer appears to be reversing somewhat, which should act as an important stabilizing force. At present, stocks are attractively valued and are on the cheap side - the S&P 500 Index is trading at 11.5 times forward consensus earnings, and the dividend yield for stocks is close to the yield of the 10-year Treasury bond. While no dramatic breakout of the current trading range should come any time soon, the path of least resistance for stocks continues to be up.
Weekly Investment Commentary
While the recovery has been slow, we have made significant progress. On a real basis, U.S. gross domestic product has regained 70 percent of what was lost during the recession and on a nominal basis, GDP has regained all of it, meaning that the United States is in a nominal expansion. In any case, investors in U.S. stocks can expect continued volatility ahead. The S&P 500 Index has remained in a rough trading range of between 1,020 and 1,120. While a dramatic breakout from this range is unlikely for now, as economic conditions slowly improve, the positive forces should win out.
Weekly Investment Commentary
The sharp pullback in bond yields throughout the past couple of weeks suggests that fixed income markets are discounting a return to recession conditions. In contrast, the relative resilience of the stock market suggests that equities are discounting a milder slowdown in the pace of recovery. BlackRock believes that fixed income markets are overly pessimistic, but acknowledges that it will take some time to work all of this out, meaning that stocks are likely to remain in a trading range.
Investment Commentary
The outlook for stocks will be highly dependent on the direction of the economy. Despite last week's decline in both equity prices and Treasury yields, financial markets are signaling that the worst of the deflation scare is ending and that renewed recession is unlikely. A strong current of skepticism is likely to persist for some time, and volatility levels will likely remain elevated, but as long as the economy does not retreat back into recession, stocks should be able to continue to make gains.
Weekly Investment Commentary
Many risks remain to the current cautiously optimistic outlook, including the failure of the housing market to stage a meaningful recovery, the need for ongoing consumer deleveraging and the move toward fiscal austerity in many markets. As long as the economy does not fall back into recession, however, equity markets should be able to grind higher over time. Economic growth of around 2 percent should be enough to allow corporate earnings to continue to grow, and that backdrop, combined with still-attractive valuations, should make for an equity-friendly environment.
Weekly Investment Commentary
Market volatility has remained elevated over the past several months as investors remain uncertain about the future direction of global and U.S. economic growth. There is a lack of conviction and confidence on the part of businesses, consumers and investors, but as long as the economy does not slide back into recession, corporations should be able to continue to grow their earnings. A combination of positive (if slow) economic growth, solid corporate earnings and attractive equity market valuations should be enough to restore some positive momentum in equity markets over time.
Weekly Investment Commentary
A sustained, albeit subpar, economic recovery is in the cards. Neither critical equity sectors nor credit spreads are signaling that the recovery has been derailed, which suggests that the cyclical recovery in corporate profits is not over. Still, the US economy continues to face significant headwinds, giving us reason to believe that the move higher in equity and other risk asset prices will likely be a long, hard grind characterized by continued volatility.
Weekly Investment Commentary
Stock prices have corrected sharply since mid-April and have remained in a broad trading range for the past several weeks. Equity markets appear to be caught between a number of positive and negative forces. Over time, the positive forces should win out and stocks should grind higher, but it would not be surprising to see equity markets remain in their current trading range until there is more clarity around the severity of the current economic slowdown.
Weekly Investment Commentary
With 20/20 hindsight, it seems clear that investor expectations for the economy and earnings were too optimistic during the first four months of 2010, but overall sentiment also grew too pessimistic in the subsequent couple of months. The current low levels of Treasury yields are unsustainable. Either yields will move higher as investors become more risk tolerant or economic fundamentals will deteriorate. The former is more likely, however, and as long as our view about the economy holds, equity markets will be able to grind higher in the months ahead.
Update: 10 Predictions for 2010
Over the long term, policymakers still have a difficult job to do as they work to unwind the massive amount of stimulus that had been injected into the system without causing either inflation issues or renewed deflation threats. Over the short term, the broad macro environment will continue to be buffeted by financial and economic uncertainty that will keep volatility levels elevated. That said, the odds for a double-dip recession are low. As long as a renewed economic contraction is avoided, equity prices should grind higher over time.
Investment Commentary
We entered 2010 expecting a modest cyclical recovery countered by the structural problems that faced most of the developed world. For the first part of the year, the cyclical recovery did dominate, but in recent months, structural problems (especially those in Europe) began to win out and risk assets have been struggling. Now at the mid-year point, we thought it would be a good opportunity to take a look back at the predictions we made at the beginning of the year to see where we stand.
Odds of a Double-Dip Recession Remain Low
Equity markets should be able to make additional gains over the course of this year. This outlook is not so much a forecast of significantly improving economic news as it is an expectation that many of the risks facing investors will fade over the coming months. The direction of financial regulatory reform in the United States should become clearer and the slowdown in Chinese growth should result in a soft landing. The uncertainty surrounding European sovereign debt, however, remains the chief wild card.
Twelve Weeks Later, The Recovery Remains On Track
Equities have already priced in the likelihood of somewhat slower economic growth in the coming months. Volatility measures will remain high because markets still remain subject to many risks, not the least of which is the high degree of uncertainty surrounding the European debt crisis. In any case, the bulk of the current correction should be behind us, while the positive macro backdrop and improving valuations will provide a floor for equity prices. Investors will need to remain patient, since it will still take some time before base-building can allow markets to regain ground.
Bull Market Should Continue, But Patience is Warranted
Markets remain caught in a tug of war between reasonably strong economic fundamentals and escalating threats of external shocks. As long as the world economy does not sink back into an unlikely recession, however, equity markets should be able to weather the current period of uncertainty. The economic recovery should continue, although the pace should be relatively slow and interrupted along the way by periods of disappointing data. Investors will need to see a recovery in European debt markets and evidence that contagion can be contained before confidence can be restored.
Fundamental Strength Should Beat Out Heightened Uncertainty
In previous business cycles, when credit market pressures surfaced at a time when the yield curve was steep, the economy experienced brief slowdowns, but not recessions. If that is also the case today, then what we are looking at should be a temporary slowdown in growth, but not a double-dip recession. Nervous investors and slowly receding uncertainty levels will keep market volatility high over the coming month. However, should the labor market recovery continue, the backdrop of strengthening corporate profits and a recovering economy should push equity prices higher.
Correction Should Be Nearing Completion
The worst of the downturn should be behind us, but it will likely take some additional time before markets can repair themselves. Looking ahead, one positive factor is that market valuations have become more attractive in recent weeks, as prices have dropped while earnings have increased. Over time, additional clarity around the situation in Europe and financial market reform in the US should provide a measure of stability; and a sense that the economic recovery remains on track should help spark a turnaround in the recent aversion to higher-risk assets.
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