Are We Near the End of the Correction? (Doll)

Monday, May 21st, 2012

May 21, 2012

Stocks Drop as Europe Takes Center Stage

by Bob Doll, BlackRock

Although US economic data was generally good last week, stocks sank sharply as investor fears over Europe’s debt problems intensified. For the week, the Dow Jones Industrial Average fell 3.5% to 12,369, the S&P 500 Index dropped 4.3% to 1,295 and the Nasdaq Composite declined 5.3% to 2,778.

At present, the focus of the European debt crisis is on Greece, particularly on next month’s elections. The upcoming elections look to be turning into a referendum on whether or not Greece will remain part of the eurozone. Should the more extreme parties in Greece gain popularity, the greater the likelihood that the country exits the eurozone. The more traditional Greek political parties, as well as the powers that be in Europe as a whole, are pushing for Greece to remain part of the euro, but the outcome is far from clear and the uncertainty has rattled global financial markets.

Of course, Greece is capturing most of the headlines, but perhaps more worrisome is the debt contagion that appears to be spreading to other countries such as Spain and Italy. It is important to note, however, that contagion is not spreading as widely or as deeply as it did last year. This resilience reflects the sounder position of both the global financial system and global economic indicators, although it is difficult to take too much comfort in this fact since a broader resolution of the eurozone crisis is not yet in sight.

In some sense, the only hope for the eurozone is to lower monetary policy further, which would also push the value of the euro lower. Additionally, we believe the European Central Bank would have to engage in larger-scale bond purchases to improve financial market liquidity. The alternative could be the disintegration of the euro over time.

US Recovery Remains on Firm Ground

Despite the mounting crisis in the eurozone, the US economic recovery continues to look stable. Retail sales growth has slowed recently, but we expect the decline in oil prices could help reverse that trend and provide a boost to consumption. Additionally, business spending remains solid and we are seeing a pickup in residential construction. The labor market strength that was evident earlier in the year appears to have ebbed somewhat, but we are calling for improved employment growth in the second half of the year. Our overall economic growth forecast has not changed since the beginning of the year. In January, we were forecasting that the United States would experience growth of between 2% and 2.5% in 2012, and we are sticking to that forecast.

Given the recent increase in global financial stress and the stumble experienced by stocks, there has been some renewed discussion as to whether the Federal Reserve might engage in additional easing measures. At this point, we do not believe that is likely. In our view, the Fed would need to see some deterioration in the pace of economic growth before it would decide to take action.

Market Positives Should Win Out

While it is true that US stocks have taken a turn for the worse over the last month, other markets (particularly European stocks) have been hurt even more. On a year-to-date basis, European stocks are down roughly 3%, while US stocks are still up close to 6%. This divergence represents a continuation of the pattern that has been in place since the current bull market started in March 2009. Since that time, US stocks have appreciated by nearly 70%, while European equities have climbed by just a little more than 10%.

So what is the likely outcome for US stocks given the prevailing backdrop? In the near term, it appears stocks will continue to face crosscurrents that have solid corporate earnings and economic growth pushing prices higher and uncertainty and fear over macro risks pushing them lower. Until these crosscurrents diminish, we expect the volatile trading pattern we have seen over the last several weeks could continue.

Several weeks ago, we suggested the current market correction could push the S&P 500 down to somewhere between the 1,300 and 1,350 level. We are just below the low end of that zone right now, which begs the question of whether the correction is near an end. Forecasting near-term market swings is, of course, an impossibility, but we would point out that with sentiment low, investor cash levels high and valuations compelling, stocks do appear attractive. In our view, markets are awaiting some sort of positive jolt (perhaps in the form of a policy response in Europe or some stronger US economic data) to break out toward the upside.

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.

You should consider the investment objectives, risks, charges and expenses of any fund carefully before investing. The funds’ prospectuses and, if available, the summary prospectuses contain this and other information about the funds, and are available, along with information on other BlackRock funds by calling 800-882-0052. The prospectus and, if available, the summary prospectuses should be read carefully before investing.

The information on this web site is intended for U.S. residents only. The information provided does not constitute a solicitation of an offer to buy, or an offer to sell securities in any jurisdiction to any person to whom it is not lawful to make such an offer.

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 May 21, 2012, 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.

BlackRock is a registered trademark of BlackRock, Inc. All other trademarks are the property of their respective owners.

Prepared by BlackRock Investments, LLC, member FINRA.
NOT FDIC INSURED / MAY LOSE VALUE / NO BANK GUARANTEE

Tags: Blackrock, Bob Doll, Contagion, Debt Crisis, Debt Problems, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Data, Eurozone, Gain Popularity, Global Economic Indicators, Global Financial Markets, Global Financial System, Investor Fears, Market Liquidity, Nasdaq Composite, Reta, Upcoming Elections, Value Of The Euro
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Market Drawdown Presents Buying Opportunities

Tuesday, April 17th, 2012

Market Drawdown Presents Buying Opportunities

by Bob Doll, Chief Equity Strategist, Fundamental Equities, BlackRock

April 16, 2012

Another Downturn for Stocks

Once again, risk assets struggled last week with most investors blaming the downturn on re-ignition of concerns over the European debt crisis brought about by a disappointing debt auction in Spain. For the week, the Dow Jones Industrial Average fell 1.6% to 12,849, the S&P 500 Index declined 2.0% to 1,370 and the Nasdaq Composite dropped 2.3% to 3,011.

Does History Repeat? Or Just Rhyme?

Last year around this time, stocks were coming off an impressive first quarter, but were headed for trouble. Higher oil prices, the earthquake in Japan and the brouhaha over the US debt ceiling all conspired to cause a sharp turnaround in risk assets. So far this year, stocks have been following a somewhat similar pattern as early strength for equities appears to be fading somewhat. So, it is worth asking the question: Will 2012 look like 2011?

There are some aspects of the financial and economic backdrop that do look similar between the two years. In addition to the flare ups in Europe regarding debt problems, we are currently in the midst of a period of rising energy prices. Gasoline prices in particular are getting close to last year’s peaks. We are also seeing some renewed weakness in the economic data—the pace of jobs growth slowed in March and consumer confidence levels have been looking softer. Should gasoline prices continue to rise, it would be reasonable to fear that the spillover effect onto the rest of the economy would worsen.

We believe it would be a mistake, however, to look too closely to 2011 as a model for what might happen this year. For starters, current expectations for both the economy and the markets are worse than they were at this point last year. In early 2011, investors were pricing in a better economic environment than what would ultimately come to pass. In contrast, at this point we believe that markets are already priced for relatively modest levels of growth, suggesting that there is less room for downside disappointments. Additionally, the fundamental strength of the economy is better now than it was one year ago. Notwithstanding last month’s data, the labor market is stronger than it was, housing appears to be bottoming and US credit conditions have been improving. Finally, it is important to remember that the recovery and market strength last year were, to some extent, derailed by the natural disasters in Japan and by S&P’s credit downgrade of the United States. While external shocks are always a risk, we can hope that these sorts of factors will not be repeated.

Reasons for Optimism

Given the relative differences between the economy in 2011 and what it looks like today, we believe the US economy will be more resilient than it was last year, providing some support for US equities.

In addition to the economic backdrop, we would also look to corporate earnings as a source of strength. Although we are forecasting that the pace of earnings growth will be slower this year than it has been in the recent past, so far the data has shown that corporate earnings have been doing just fine. Expectations for the first quarter have been set relatively low, but so far over 80% of the companies that have reported have surpassed expectations, which is a good sign. (In comparison, in the previous several quarters around 60% to 70% of companies beat expectations.)

Putting all of this together, we would argue that we are unlikely to see the sort of sharp and severe pullback in stock prices that we witnessed in 2011. We do, however, expect to see higher levels of volatility in the months ahead compared to what we experienced in the first quarter and we would not be surprised to see the current pullback take the markets down to around the 1,350 or 1,300 level for the S&P 500. Such a pullback would represent a normal correction occurring in the midst of a bull market. Furthermore, we also believe that stocks should see a resumption of gains after the current period of weakness, which could create buying opportunities for investors.

Tags: Bob Doll, Brouhaha, Confidence Levels, Consumer Confidence, Debt Ceiling, Debt Crisis, Debt Problems, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Drawdown, Earthquake In Japan, Economic Backdrop, Economic Data, Energy Prices, Flare Ups, Gasoline Prices, Nasdaq Composite, Rising Energy, Spillover Effect
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Overcoming Objections to Equities (Doll)

Tuesday, March 27th, 2012

March 27, 2012

Rising Bond Yields: A Concern?

Stocks sank last week, but the focus for investors has been on developments in the bond market. Within equities, the Dow Jones Industrial Average lost 1.2% to 13,080 and the S&P 500 Index declined 0.5% to 1,397, while the Nasdaq Composite managed to post a 0.4% gain to 3,067.

The yield on the benchmark 10-year Treasury had been trading at around the 2.0% level for a period of several months before moving sharply higher in recent weeks. The yield rose to above 2.35% last week before settling at around 2.25% by the end of the week (bond prices move inversely to yields). The selloff in bonds has caused some to wonder whether we are at the forefront of a bond bear market. Additionally, it raises questions about what yield movements mean for the stock market.

First, as we indicated last week, we would not be surprised to see additional upward moves in yields, at least in the short term. Economic news has been relatively good over the past few months and as long as that trend continues, yields should retain an upward bias. This is not to say, however, that a bond bear market is upon us. Typically, bond bear markets happen during periods of interest rate policy tightening. While the Federal Reserve has indicated that economic trends have been improving, there is almost no evidence to suggest that the United States is entering into an inflationary environment, and the central bank has maintained its forward guidance that short-term interest rates are set to remain low for some time.

Additionally, we do not believe that higher bond yields by themselves will act as an impediment to the stock market. While it is true that any sharp and sudden moves in yields have the potential to unnerve investors, such effects are likely to be temporary. Over the longer term, we do not believe that modestly higher yields should be a source of concern for stocks, especially since we believe that the rise in yields is coming as a result of improved economic conditions.

Economic Trends Remain Market Friendly

So what are some of the improved economic conditions that have been pushing yields higher? We have devoted quite a bit of space in recent weeks to discussing the improvements in the labor market, and while jobs growth is certainly among the most important economic indicators, there are other factors that have been showing signs of improvement as well.

Debt deleveraging remains a source of concern, but we have been seeing progress on that front. Individuals have been paying down their debt over the past few years and household debt levels have been falling noticeably. Similarly, the housing market has long been a significant source of weakness, but that sector of the economy does appear to be in the midst of a long-term bottoming process and may be entering into some sort of recovery.

An additional issue on the minds of many investors is the US fiscal situation. The end of this year marks several important deadlines, including the scheduled expiration of the Bush-era tax cuts and temporary incentive measures as well as the beginning of scheduled spending cuts. Forecasting exactly what will happen on the fiscal front is complicated due to this November’s elections, but our guess is that there is probably a 50% chance (maybe marginally higher) that some sort of tax compromise is enacted either later this year or early next year. The likelihood of a bipartisan compromise on entitlement reform would be less likely.

Looking Past Downside Market Risks

There are a number of angles that could be taken if one wanted to emphasize potential downside market risks. In addition to concerns over rising yields, we could point to economic and debt problems in Europe, concerns over growth in China, relatively modest levels of global economic growth, weakening trends in corporate profits and escalating geopolitical tension in the Middle East.

While all of these concerns are real, we would argue that the current strong run for equities has mostly been a result of macro risks receding. We argued at the beginning of the year that as long as fundamentals were at least decent, that should be good enough for risk assets. We never believed that solid market performance would require a significant turnaround in global economic growth conditions and a continued environment of modestly positive fundamentals should remain a market-friendly one.

In our view, stocks still remain attractively valued and the market is still discounting a more negative environment than what we expect. Corporations remain flush with cash and are poised to engage in a number of shareholder-friendly activities. From an individual investor perspective, a large number of people are still underweight stocks and we have yet to see significant moves into equity mutual funds. As such, we believe we have not yet seen the end of the market’s upward moves.

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.

You should consider the investment objectives, risks, charges and expenses of any fund carefully before investing. The funds’ prospectuses and, if available, the summary prospectuses contain this and other information about the funds, and are available, along with information on other BlackRock funds by calling 800-882-0052. The prospectus and, if available, the summary prospectuses should be read carefully before investing.

The information on this web site is intended for U.S. residents only. The information provided does not constitute a solicitation of an offer to buy, or an offer to sell securities in any jurisdiction to any person to whom it is not lawful to make such an offer.

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 March 26, 2012, 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.

BlackRock is a registered trademark of BlackRock, Inc. All other trademarks are the property of their respective owners.

Prepared by BlackRock Investments, LLC, member FINRA.
NOT FDIC INSURED / MAY LOSE VALUE / NO BANK GUARANTEE

Tags: 10 Year Treasury, Bear Market, Bear Markets, Bond Market, Bond Prices, Bond Yields, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic News, Economic Trends, Impediment, Inflationary Environment, Interest Rate Policy, Nasdaq Composite, Overcoming Objections, Selloff, Sudden Moves, Term Interest, Upward Bias
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Stocks: More Room to Run

Tuesday, March 20th, 2012

March 19, 2012

Stocks Rise to New Cyclical Highs

Equity markets around the world continued to advance last week, again thanks to continued improvements in economic growth and an overall sense that macro risks have been receding. In the United States, stocks rose to new post-credit-crisis highs, with the Dow Jones Industrial Average advancing 2.4% to 13,232, the S&P 500 Index rising 2.4% to 1,404 and the Nasdaq Composite gaining 2.2% to end the week at 3,055.

At the same time, bond prices sank as yields moved sharply higher, with the yield on the 10-year Treasury jumping to close to 2.3% after trading at around 2.0% for several months. Meanwhile, oil and gasoline prices rose again, gold prices fell and the US dollar gained some strength.

Economic Growth Shouldn’t Be Derailed by Higher Oil Prices

As we have been saying for the past several weeks, it appears the US economy is improving to the point that it is entering a self-sustaining cycle, helped in large part by advances in the labor market. We have recently been seeing improvements in retail sales (with January’s figures up by 1.1%) and we are expecting that gains in employment will translate into faster income appreciation and additional consumption. One cautionary note is that jobless claims have stopped falling in recent weeks, which suggests that the future pace of jobs growth may be more subdued than we have seen in the past few months. It is possible that the warm winter weather may have skewed jobs growth to the upside.

At the beginning of the year, two of the main risks to global economic growth appeared to be the ongoing European credit crisis and the possibility of a hard landing in China. While those risks seem to have receded since that point, a new one has emerged: rising oil prices. Since December, oil prices have advanced by roughly $20 per barrel. Our assessment is that roughly half of that comes from growing optimism about the prospects for global growth as well as some supply shortfalls. The other half can be attributed to the risk premium coming from noise in the Middle East and concerns about Iran. Quantifying the exact impact of the “Iran premium” is extremely difficult since there is a near-limitless range of possible developments that could impact oil prices. The worst-case scenario would be for some sort of military conflict that could disrupt the flow of oil through the Straits of Hormuz, but at this point that seems unlikely.

In any case, it is important to remember that the current run up in oil prices is still only about half of what occurred around this point last year, and at present we do not believe oil prices have risen to the point that they represent a significant threat to the pace of global growth.

Treasury Yields Rise: What Does It Mean for Stocks?

An additional development that drew attention last week was the dramatic rise in Treasury yields. The rise in yields came at the same time that the Federal Reserve held its regular interest rate policy meeting. At that meeting, the Fed confirmed that economic growth is clearly not weakening and may be strengthening, and the central bankers retained their commitment to keeping rates low for the foreseeable future. At this point, markets appear to be signaling that an additional round of quantitative easing is not in the cards, which (along with improved growth) helps explain the advance in yields.

The selloff in bonds does raise the question of how much further it can go before higher yields represent a threat to equity markets. In our view, current macro conditions warrant additional increases in yields. We believe a fair value for the 10-year Treasury is currently around 2.5% or higher. It is important to remember that before last week, we saw several months of improved economic data without a corresponding rise in yields, so in many respects, last week’s moves represent a sort of “catch-up” effect for the bond market. We believe the current trend of rising yields signals an acknowledgement of growing optimism around the economy and, as such, is a positive for stocks.

Stocks Likely to Grind Higher From Here

While it is important to remain cognizant of the risks facing the markets, our overall view toward stocks remains constructive. Since the current rally began last autumn, we have seen some market pullbacks, but they have been brief and shallow, likely because many investors remain underweight equities and have been using pullbacks to buy on price dips. Now that bond prices are falling, we believe investors as a whole will finally begin to move out of Treasuries and into stocks. As such, as long as the macro fundamentals remain reasonably good, we believe equities should grind higher from here.

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.

You should consider the investment objectives, risks, charges and expenses of any fund carefully before investing. The funds’ prospectuses and, if available, the summary prospectuses contain this and other information about the funds, and are available, along with information on other BlackRock funds by calling 800-882-0052. The prospectus and, if available, the summary prospectuses should be read carefully before investing.

The information on this web site is intended for U.S. residents only. The information provided does not constitute a solicitation of an offer to buy, or an offer to sell securities in any jurisdiction to any person to whom it is not lawful to make such an offer.

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 March 19, 2012, 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.

BlackRock is a registered trademark of BlackRock, Inc. All other trademarks are the property of their respective owners.

Prepared by BlackRock Investments, LLC, member FINRA.
NOT FDIC INSURED / MAY LOSE VALUE / NO BANK GUARANTEE

Tags: Bond Prices, Cautionary Note, Credit Crisis, Cyclical Highs, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Gasoline Prices, Global Economic Growth, Global Growth, Gold Prices, Jobless Claims, March 19, Nasdaq Composite, Optimism, Prospects, Retail Sales, Rising Oil Prices, Supply Shortfalls, Warm Winter Weather
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Equity Gains Likely to Continue, But at a Slower Pace (Doll)

Wednesday, February 29th, 2012

by Bob Doll, Chief Equity Strategist, BlackRock

Markets Climb to 12-Month Highs

Stock prices rose again last week, although at a more labored pace than has been the case for most of 2012. For the week, the Dow Jones Industrial Average rose 0.3% to 12,982 (and did move above the psychologically important 13,000 level a few times), the S&P 500 Index advanced 0.3% to 1,365 and the Nasdaq Composite climbed 0.4% to 2,963. With these gains, markets have reached new 12-month highs and have rallied close to 25% from their low point of October 2011.

A Quiet Week for the Economy, But Good News Nonetheless

It was a relatively subdued week in terms of economic data, with the highlight perhaps being the weekly initial unemployment claims, which were unchanged (a stronger-than-expected result). This data helps confirm that improvements in the labor market have been gaining traction. This Friday we will see the February employment report and most economists are calling for a new jobs number of 200,000 or higher with a flat or perhaps slightly lower unemployment rate.

One area of the economy that has long been troubled is the residential housing sector, but this area of the economy is beginning to show some limited signs of improvement. New home sales, mortgage applications and home building levels are all showing some gains and the large inventory of unsold homes is beginning to clear. We believe that the housing market remains in the midst of a multi-year bottoming process that began in 2009 and we expect that residential construction will be a modest positive contributor to growth in 2012, as it was last year.

From a global perspective, the world economy has experienced a decent start to 2012, but the ongoing recovery does have some risks and question marks. Fiscal policy remains tight in some quarters of the globe and there is still room for easing (as we saw with the Bank of Japan’s recent decision to enact some new quantitative easing measures). Additionally, ongoing debt deleveraging remains a concern, as does the recent move higher in oil prices. Of course, we would also add the ongoing European debt crisis to the list of issues that could potentially disrupt the global economy’s positive momentum.

Climbing Oil Prices Spark Concerns

Several of the risks that we have been discussing for some time now have ebbed over the last several months, such as the removal of the uncertainty over the US payroll tax cut extension, some additional clarity over the Greek debt restructuring and China’s policy easing and likely economic soft landing. An additional risk, however, has surfaced in the form of higher oil prices. The oil price spike from early 2011 is fresh in investors’ minds and the recent advance in oil prices has some wondering whether history will repeat itself. Last year’s price spike came as a result of social and political unrest throughout the Middle East and in North Africa and this year escalating geopolitical tensions with Iran has been the primary culprit.

While higher oil prices are unambiguously a negative for global economic growth and have the potential to act as a drag on equity markets, the scale of the recent increase has still been relatively modest. To put it in context, oil prices have advanced by around 20% over the last few months. In contrast, oil jumped 50% between September 2010 and March 2011. While higher oil prices bear watching, we would not consider oil a significant risk unless the price increase grows more severe.

Further Gains for Stocks?

The impressive advance we have seen in stock prices over the past several months has largely come about from a string of positive economic news and the absence of the emergence of additional downside risk. In other words, a few months ago, stocks were priced for a weaker macro environment than the one that has come to pass. So what will it take for stocks to continue to move higher? We believe we would need to see some broader improvements in economic data and/or further political progress in terms of reducing macro uncertainty.

Regarding that second point, last week’s announced Greek debt restructuring deal should help reduce some uncertainty, assuming the measures are successfully implemented. There was little market response to the announced deal as it generally met investors’ expectations and there is still more work to be done on this front. We expect the situation in Greece to worsen from both a fiscal and social perspective, but we also believe that the debt restructuring will move forward.

Equity risk premiums have fallen in recent months as markets have rallied and we do believe that there is room for further advances. At the same time, however, we expect the pace of price appreciation to become slower and more uneven. As we have been saying for the last couple of weeks, we would not be surprised to see some sort of pullback or correction in the near term, but we also believe that stock prices will end the year higher than where they are today.

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.

You should consider the investment objectives, risks, charges and expenses of any fund carefully before investing. The funds’ prospectuses and, if available, the summary prospectuses contain this and other information about the funds, and are available, along with information on other BlackRock funds by calling 800-882-0052. The prospectus and, if available, the summary prospectuses should be read carefully before investing.

The information on this web site is intended for U.S. residents only. The information provided does not constitute a solicitation of an offer to buy, or an offer to sell securities in any jurisdiction to any person to whom it is not lawful to make such an offer.

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 February 27, 2012, 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.

Copyright © BlackRock

Tags: Bank Of Japan, Bob Doll, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Data, Employment Report, Fiscal Policy, Global Perspective, Housing Market, Initial Unemployment Claims, Mortgage Applications, Nasdaq Composite, New Jobs, Question Marks, Residential Construction, Stock Prices, Strategist, Unemployment Rate, World Economy
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Progress in Europe Lifts Sentiment (Doll)

Tuesday, December 13th, 2011

by Bob Doll, Chief Equity Strategist, BlackRock, Inc.

A Volatile, but Positive, Week for the Markets

Markets traded in a volatile fashion last week, with investors quickly reacting to news and rumors surrounding responses to the ongoing European debt crisis. Thanks to a rally on Friday, markets ended the week in positive territory, with the Dow Jones Industrial Average climbing 1.4% to 12,184, the S&P 500 Index climbing 0.9% to 1,255 and the Nasdaq Composite advancing 0.8% to 2,646.

Euro Summit Deal Represents Tangible Progress

Market action last week centered on the European summit that took place on Thursday and Friday. While no one is suggesting that the debt crisis will go away any time soon, the framework agreement that was reached has at least reduced some of the anxiety and appears to have eased the gridlock in European financial markets.

Although there are many details that still need to be worked out, it does appear that most parties in Europe are in agreement about the need to establish a more stable fiscal union that has tighter controls over the region’s debts and deficits. While these moves will do little to ease the near-term debt issues affecting many European countries, they are important in that they represent the start of the process of assuring investors and central bankers (particularly the European Central Bank) that politicians are serious about fiscal discipline and that they can no longer delay action. In our view, last week’s summit may well represent the first tangible positive developments since the crisis began.

For its part, the ECB did cut interest rates by another 25 basis points last week. This is an important step and mirrors the broader global trend of central banks moving from a tightening to an easing bias that has occurred over the course of 2011. The European Central Bank, however, stopped short of indicating that it would be willing to provide further support for the European banking system. The ECB has clearly been unwilling to take up the charge of being a lender of last resort for the region, but it does seem likely that the central bank will become more proactive if it sees real progress being made in terms of greater fiscal stabilization.

Economic and Investing Environment Continues to Show Signs of Improvement

We have been suggesting over the past several weeks that economic growth in the United States appears to be accelerating, and last week’s economic data helped confirm this view. Specifically, US jobless claims fell sharply and we are optimistic that payroll growth should surprise to the upside over the coming months. Additionally, consumer spending remains solid and the corporate sector has been seeing strong profit growth, a trend we expect will continue.

While we are not calling for particularly strong levels of economic growth in the year ahead, we do believe that positive surprises may outweigh negative ones. We are expecting to see income levels rise in 2012 and are also calling for continued improvements in private payrolls creation. A key risk to this outlook remains the uncertainty over the extension of the payroll tax cut into 2012. At present, we believe it is more likely than not that a deal will be put together to extend the cuts, but absent such a deal economic and fiscal headwinds would grow.

For stocks, it is hardly likely to be smooth sailing from here, but conditions have certainly improved since the wild market swings that we saw over the summer. Looking ahead, we can identify some reasons for further optimism, particularly in terms of how resilient the US economy has been. As has been the case for many months now, the Eurozone crisis remains the key wildcard, but we may be beginning to see a clearer endgame.

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.

Copyright © BlackRock, Inc.

Tags: Basis Points, Blackrock Inc, Bob Doll, Central Banks, Debt Crisis, Debt Issues, Debts And Deficits, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, ECB, European Banking System, European Financial Markets, European Summit, Fiscal Discipline, Framework Agreement, Global Trend, Gridlock, Nasdaq Composite, Tangible Progress
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Markets Cheer Economic and Policy Progress – A Sharp Rally for Stocks (Doll)

Tuesday, December 6th, 2011

December 5, 2011

A Sharp Rally for Stocks

After two weeks of disappointing economic and policy news that drove stock prices sharply lower, stocks witnessed a strong reversal last week. The main catalyst for the rally was a global coordinated central bank policy action designed to help banking liquidity, but markets also benefited from some improved economic data. For the week, the Dow Jones Industrial Average jumped 7.0% to 12,019, the S&P 500 Index rose 7.4% to 1,244 and the Nasdaq Composite advanced 7.6% to 2,626.

Central Bank Action a Positive, but More Is Still Needed

Last week’s market action centered on the US Federal Reserve’s and other central banks’ announcement that they would provide coordinated action to boost the liquidity of the financial system by reducing dollar borrowing costs from foreign central banks by between 50 and 100 basis points. The central bank actions are clearly a positive in terms of investor sentiment and will be helpful from a practical basis regarding expanding liquidity. Importantly, the move does underscore the willingness of the Fed and other central banks to support the global banking system.

The moves by the central banks, however, do not address the root causes of the European debt crisis. On that point, Germany’s chancellor Angela Merkel and French president Nicolas Sarkozy have been pushing hard for increased European integration and more effective fiscal discipline. Should these efforts succeed, they would provide some reassurance to the policymakers at the European Central Bank (ECB) that the politicians are serious about establishing the fiscal measures the ECB believes are necessary, which could pave the way for additional ECB intervention in the market. Whether any of this comes about is, of course, still an open question since any proposed plan would need the backing of countries other than Germany and France, but it does appear that the parties are moving in the right direction.

Also on the global policy front, China announced last week that it would lower its bank reserve requirements. This likely represents the first in a round of reductions and should be stimulative for Chinese growth, helping reduce the probability of a hard landing.

US Economic Improvements Continue

In the United States, economic data continues to point to an acceleration in growth. November’s labor market report was a solid one, showing that jobs growth came in at 120,000 (with private payrolls increasing by 140,000). The data also showed some solid upward revisions to October and September jobs growth. At the same time, unemployment fell noticeably in November, although it remains uncomfortably high at 8.6%. In addition to the labor market data, consumer confidence measures moved higher for November, which is a reflection of improved economic activity on a number of fronts.

In addition to the solid economic data, there have also been some signs of progress on the political front. It is still much too early to say for sure, but signs are emerging that politicians may be able to come together to enact an extension of the payroll tax cut (and possibly unemployment benefits) that are set to expire on December 31. Should these extensions not occur, they would cause a fiscal headwind in the first part of 2012.

Outlook Still Mixed, but Slowly Improving

Although last week’s news was positive (and investors were certainly cheered by recent events) it is too early to declare any sort of victory and it is important to remember that the market gains that occurred last week did not match the losses of the previous two weeks. In any case, however, it does appear that conditions are continuing to improve. The coordinated rate action and continued easy availability of money should ease some of the world’s debt burdens. On the economic front, we are expecting gross domestic product growth in the United States to increase to at least 3% in the fourth quarter, which should provide further evidence that the macro backdrop is getting better. The main risk remains a potential Eurozone failure or breakup, but the odds of that occurring have been at least slightly reduced.

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.

Disclaimer:

The information on this web site is intended for U.S. residents only. The information provided does not constitute a solicitation of an offer to buy, or an offer to sell securities in any jurisdiction to any person to whom it is not lawful to make such an offer.

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 December 5, 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.

BlackRock is a registered trademark of BlackRock, Inc. All other trademarks are the property of their respective owners.

Tags: Angela Merkel, Central Banks, Chancellor Angela Merkel, Debt Crisis, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, European Integration, Fiscal Discipline, Fiscal Measures, French President Nicolas, French President Nicolas Sarkozy, Global Banking, Investor Sentiment, Nasdaq Composite, Nicolas Sarkozy, Open Question, President Nicolas Sarkozy, S Market
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Stocks Buffeted by Euro Fears and Super Committee Failure (Doll)

Tuesday, November 29th, 2011

by Bob Doll, Chief Equity Strategist, Blackrock, Inc.

November 28, 2011

A Sharp Drop for Stocks

Equity markets sank sharply last week as the European debt crisis worsened and the US super committee failed to come to an agreement. For the week, the Dow Jones Industrial Average fell 4.8% to 11,231, the S&P 500 Index dropped 4.7% to 1,158 and the Nasdaq Composite sank 5.1% to 2,441. Because the political problems in the United States and the crisis in Europe could result in a nearly endless array of outcomes, investors are faced with a high degree of uncertainty. As a result, unless and until more clarity emerges, markets are likely to remain somewhat trendless in the near term.

Outlook Uncertain for the European Debt Crisis

While much of the focus on the euro crisis has been on Greece and its risk of defaulting, in recent weeks, that focus has shifted to a general lack of liquidity within the European debt markets as banks struggle to maintain credit ratings. Many large global banks are attempting to sell or reduce their exposures to troubled European sovereign debt, and the selling pressures are triggering a new surge in government bond interest rates. This, in turn, has been forcing more countries into higher debt burdens and bigger deficits.

At this point, it has become clear that the measures taken so far to stem the crisis have not been sufficient. In our view, it will probably require the creation of something like a commonly issued euro bond to contain the debt crisis. Although Germany has so far resisted that possibility, there are growing indications that such a solution may well be forthcoming.

Regardless of what happens in the debt crisis itself, a recession in Europe now seems a foregone conclusion. Should policymakers be able to come to an effective resolution soon, the recession is likely to be shallow, but risks are growing that the recession could be deeper. It is an open question as to how much a European recession would impact the United States and other global markets. The main risk comes in the form of the intertwined nature of the global credit markets since severe European bank deleveraging could negatively impact US credit availability as well.

Super Committee Failure Creates a Murky Debt Future

The failure of the super committee to provide a plan to reduce the deficit was certainly disappointing, but it would be a mistake to put too much stock in that specific incident. The deadline imposed by Congress was an arbitrary one and the automatic cuts set to take place as a result of the non-decision will not occur until January 2013. As a result, Congress still has an opportunity to address deficit reduction, but of course the fact that all of this is occurring with the backdrop of the 2012 elections means that uncertainty levels are elevated.

In our view, the more important question is whether or not Congress will be able to extend the payroll tax cuts and unemployment benefits set to expire at the end of this year. Should they be unsuccessful in doing so, it would likely create a significant fiscal headwind in 2012.

Stocks Likely to Remain Range-Bound

Somewhat lost amid all of the euro debt and US political headlines has been the fact that US economic data has continued a gradual improvement. The November payrolls report is set to be released this Friday and indications are that it will be decent. True, last week it was reported that third-quarter gross domestic product (GDP) growth was revised lower, but the inventory reduction that occurred may help set the stage for a stronger fourth quarter. At this point, fourth-quarter GDP looks to come in at 3% or possibly higher based on improved profits, a better labor market, increased capital expenditures and a low cyclical starting point for inventories.

Economic acceleration should create firmer footing for stocks, but for the time being, we believe markets will remain focused on the short-term headlines. Of all of the factors affecting the markets (US politics, the economic slowdown in China, etc.) the most critical remains the European debt crisis. Stocks are likely to remain range bound (trading between the 1,100 and 1,250 level for the S&P 500) for now, but should policymakers be successful in gaining some traction, markets could see some better results.

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 November 28, 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.

BlackRock is a registered trademark of BlackRock, Inc. All other trademarks are the property of their respective owners.

Prepared by BlackRock Investments, LLC, member FINRA.

Copyright © Blackrock, Inc.

Tags: Blackrock Inc, Bob Doll, Bond Interest, Debt Burdens, Debt Crisis, Debt Markets, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Endless Array, Foregone Conclusion, Global Banks, Government Bond, liquidity, Nasdaq Composite, Open Question, Recession, Sovereign Debt, Strategist, Term Outlook
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Conditions Continue to Improve, but Risks Remain (Doll)

Monday, November 21st, 2011

Conditions Continue to Improve, but Risks Remain

November 21, 2011

Markets Weaken on Uncertainty

Last week was a tough one for equity markets. Investors grew uneasy in the face of renewed uncertainty about the state of the European debt crisis as well as growing indications that the US Congressional “super committee” charged with a massive deficit reduction task gave indications that they would be unsuccessful. For the week, the Dow Jones Industrial Average lost 2.9% to close at 11,796, the S&P 500 Index was down 3.8% to 1,215 and the Nasdaq Composite fell 4.0% to 2,572.

Concerns Over Europe Remain Key

In our view, the European debt situation remains the most important variable affecting the global financial markets. Concerns over Europe’s debt situation have been outweighing the positives coming from robust earnings reports and better-than-expected economic data as investors remain concerned over the possibility of a financial meltdown that could trigger a significant global economic slowdown or recession. Despite the ongoing fears, we do believe that some progress is being made.

The changes in government that have occurred in both Greece and Italy seem to be positive signs as new Prime Ministers Lucas Papademos and Mario Monti are well respected and are widely regarded as technocrats who appear committed to solving their nations’ debt problems. The question, of course, is whether or not any solutions implemented throughout Europe will take place fast enough to prevent widespread contagion.

US Super Committee Poised for Failure?

The Congressional super committee has been dominating headlines of late and current indications are that the committee may soon announce that it has failed to produce a framework for identifying the needed $1.2 trillion in deficit reduction that it was charged with. We had long suspected that the committee would pass on the toughest issues, but we had thought it was possible that the group would be able to identify cuts and savings of around $400 to $600 billion, coming up with a sort of half-victory. At present, the odds of the committee announcing that they have reached absolutely no deal are rising, which would set the stage for an across-the-board automatic set of cuts that would commence in January 2013.

Although the uncertainty surrounding the super committee is a concern for investors, it is important to remember that, unlike the debt ceiling debate that occurred over the summer, there is no looming threat of a government shutdown or any sort of debt default associated with the committee’s plans. As a result, the market impact of the committee’s plan (or lack thereof) should remain relatively contained. To us, the more important issue is whether or not Congress will be able or willing to extend unemployment benefits and payroll tax reductions. If these extensions do not occur, it would act as an economic drag into 2012.

Economic Acceleration Continues (For Now)

Although the news has been overshadowed by events in Europe and the anticipation of the super committee’s announcements, economic data has continued to be broadly encouraging. Retail sales for October were stronger than expected and initial unemployment claims recently fell to their lowest level since early 2011. A broader look back over the course of this year shows that economic growth has been accelerating. First-quarter gross domestic product ??grew by 0.4%, second quarter growth was 1.3%, third quarter growth was 2.5% and analysts are currently forecasting fourth-quarter growth of around 3.0%. While we do not expect this pace of economic acceleration to continue into 2012, we do think the data shows that the fears of a double-dip recession have largely passed.

Outlook Continues to Hinge on Europe

Notwithstanding last week’s market setback, conditions have improved noticeably over the last couple of months. In late summer, many were predicting that there was a greater-than-50% chance that the United States would sink back into recession, Europe was on the verge of falling apart and there were widespread fears of a hard economic landing in China. Today, it is growing more clear that not only has the United States avoided a recession, but it is actually showing signs of growth acceleration, Europe is showing signs of progress (although much more needs to be done) and China appears poised for a soft landing. As a result, equity markets in most parts of the world have appreciated by double-digit percentages since the height of these problems.

The question for investors, of course, is whether these sorts of gains will continue. We lean toward the optimistic side of this question, but recognize that it takes no small amount of faith to do so. We are hopeful that the economic momentum from the United States and elsewhere will remain a tailwind, but, as has been the case for months now, much hinges on the outcome of Europe’s debt problems.

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 November 21, 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.

BlackRock is a registered trademark of BlackRock, Inc. All other trademarks are the property of their respective owners.

Prepared by BlackRock Investments, LLC, member FINRA.
NOT FDIC INSURED / MAY LOSE VALUE / NO BANK GUARANTEE

Tags: Contagion, Debt Crisis, Debt Problems, Debt Situation, Deficit Reduction, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Earnings Reports, Economic Data, Financial Meltdown, Global Economic Slowdown, Global Financial Markets, Mario Monti, Nasdaq Composite, Positive Signs, Prime Ministers, Recession, Technocrats, Trillion
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Conditions Remain Fragile, But Continue to Improve

Tuesday, November 15th, 2011

Conditions Remain Fragile, But Continue to Improve

by Bob Doll, Chief Equity Strategist, Fundamental Equities, Blackrock

November 14, 2011

Eurozone Crisis Evolves With Political Changes

Markets continue to be dominated by the eurozone sovereign debt crisis, with Italy replacing Greece at the center of the crisis. How this crisis plays out is not predictable, and the upcoming days and weeks continue to be important to the outcome. Leadership changes in Greece and Italy have focused investors’ concern on whether political leadership is splintering. In our view, the crisis is moving to a point that will force leaders to make hard decisions, or the markets will simply drive Europe into recession. Notwithstanding this backdrop, risk assets were mostly up in a volatile week. The Dow Jones Industrial Average added 1.4% to close the week at 12,154, the S&P 500 Index rose 0.9% to 1,264 and the Nasdaq Composite slid 0.3% to 2,679.

To US investors, the main issue has been, and continues to be, the issue of contagion. Although US banks have been steadily rebuilding their balance sheets since 2008, the European crisis poses a threat in terms of liquidity and counterparty risk. As always, the biggest concerns are the unknowns.

US Earnings and GDP Growth Continue

Recent economic data suggests gross domestic product (GDP) growth will remain at a trend-like pace in the fourth quarter. Meanwhile, S&P 500 earnings are up more than 15% over last year and have surpassed their 2007 peak, while price-to-earnings multiples remain fairly low. In addition, money and loan growth are strengthening in the United States, and there is no sign of a renewed credit crunch. That is a big change from the worries of the summer debt ceiling debacle and tightening in financial conditions. On the other hand, while it appears job growth has also improved enough to sustain the recovery, it has not been strong enough to reduce the unemployment rate significantly.

A big unknown for US investors is the outcome of deliberations by the Congressional Joint Select Committee on Deficit Reduction, the so-called “super committee.” The group is charged with slashing the federal debt by $1.2 trillion over the next 10 years, though any resulting spending cuts or tax increases related to long-term debt reduction will not be implemented until 2013. The consensus is that this committee will achieve approximately half of the deficit reduction goal, meaning a renewed sequestration process will begin January 2013 for the remaining $600 or so billion.

The Eurozone Crisis Is Difficult, but Solvable

Returning to Europe, the real cause of the debt crisis there stems from a long period of fiscal profligacy, low productivity and excessive government spending, allowing the population to live beyond its means. These events are not all that dissimilar from those that have occurred in the United States. A financial crisis such as the eurozone debt debacle is a tough way to enforce fiscal discipline and restore some sort of equilibrium because the outcome of such a crisis is that living standards fall. Returning to equilibrium can be achieved by a sustained fall in wages and prices or by inflation and currency depreciation, which of course cuts into the real spending power of the countries and regions that are struck by the crisis.

Tags: Balance Sheets, Bob Doll, Contagion, Credit Crunch, Debacle, Debt Ceiling, Debt Crisis, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Data, GDP Growth, Gross Domestic Product, Leadership Changes, Loan Growth, Nasdaq Composite, Political Changes, Political Leadership, Sovereign Debt, Unemployment Rate
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