Investor's Business Daily
BlackRock's Doll Sees '08 Bright SpotsWednesday January 9, 6:07 pm ET
Jesse Emspak
Standing at the starting gate of the moving obstacle course called 2008, Bob Doll surveyed the field and the events likely to shape it, and for the most part he liked what he saw.
The vice chairman and chief investment officer of asset manager BlackRock, with $1.3 trillion under management, is optimistic about the economy and financial markets. One big caveat: a recession, which he sees as a mild possibility.
Doll made several predictions for the coming year. Most are predicated on the U.S. avoiding a recession.
He says global growth will slow but developing markets will still expand at a healthy clip, fueling those companies that have business outside the U.S. Exports will also be boosted by the weak dollar, though he feels the dollar's slide will slow and possibly reverse.
Both factors will help counteract economic weakness.
In addition, the Federal Reserve's recent rate cuts, adoption of a bias toward easier credit conditions and move to provide liquidity will help keep the markets afloat.
Doll concedes that housing market woes are a problem but argues that jobs and wages are more important to fuel consumer spending. Household net worth is still up, despite the hit from falling home prices.
"Most people only care about whether they are getting a paycheck," he said. The value of their home doesn't figure into everyday spending decisions.
Profit Recession
Doll predicts that the U.S. economy will not go into recession but that corporate profit growth will slow or shrink. That puts him at odds with Goldman Sachs.
He notes that analysts have revised their fourth-quarter earnings estimates downward.
In October, consensus estimates of analysts polled by Thomson Financial saw earnings falling 0.1% in the third quarter and growing 10% in Q4. By December, the consensus was -4.5% for Q3 and -3.8% for Q4.
Amid slowdowns, the most vulnerable stocks are consumer discretionary and financials. Information technology and materials are less so. Consumer staples, energy, health care, industrials, telecommunications and utilities are the least vulnerable to slowdowns.
Slower growth also will bring moderating demand for oil. Doll says oil prices will ease in 2008 but remain higher than historical norms.
The Federal Reserve will trim rates further to 3.5% or lower from the current level of 4.5%. Continued problems in the credit markets, slower wage growth in the developed world and slower global GDP growth will push the Fed to keep easing credit conditions. In doing so, the Fed will have to overcome concerns about inflation and the perception that the central bank is bailing out investors, borrowers and lenders who made bad decisions.
With productivity still rising and companies still outsourcing to cheaper labor markets, Doll says inflation should stay in check.
Rent inflation gets little attention, he says, but it is 38% of the core consumer price index. Rent increases have been declining.
Even with the fed funds rate dropping, Doll predicts the dollar will rally against the euro, British pound and Canadian dollar. All three are overvalued, and growth in Europe is even slower than in the U.S.
Meanwhile, the developing market economies will continue to grow much faster than the developed world. Their growth is less dependent on the U.S. market these days. Developing markets also show stronger capital spending than in the U.S., pushing them to outperform the U.S. and developed world. As a result of this strength, the dollar is likely to fall against emerging countries.
Stocks will reach new highs this year, Doll says. Relative to other asset classes -- housing and bonds -- they are cheap.
Doll compares prices and how much income or earnings assets generate. He notes that price-rent ratios for housing, measured as the median home price over median rent, is 24.8. The equivalent for bonds, the inverse of the 10-year yield, is 22.8. For stocks, the trailing price-earnings ratio for the S&P 500 is 16.7.
Stocks will be led higher this year by large-cap companies and growth sectors, which offer more attractive valuations, he says.
Wrong Again?
Doll said he got 81/2 of his 10 predictions for 2007 right. He missed on Japan, believing its economy would finally outperform other developed nations. Japan has lagged, he says, because consumers won't spend money. With a high savings rate and an aging population, he is not optimistic.
"If they don't spend money, it's going to be hard for them to benefit from all the good things that are happening around Japan," he said, referring to the strong growth from other Asian countries.
He took half credit on his yield-curve prediction, since it didn't turn mildly positive until late in the year.
