The U.S. economy will muddle through even as domestic stocks rake in double-digit percentage returns for the third straight year, said Robert C. Doll, the chief equity strategist for fundamental equities at BlackRock, in a breakfast briefing in New York City Tuesday.
The good news for this year, Doll’ said, is that consumer and investor confidence levels will improve, the growth outlook will accelerate, and deflationary credit risks will shrink.
But he is cautiously optimistic: “We are still in a fractured, difficult credit-problem world. If we were in a normalized world we would have even higher growth,” he said. “Before we get carried away this will still be a below-normal recovery.”
This year, Doll predicts U.S. growth will accelerate as U.S. real GDP reaches a new all-time high. As opposed to relying on government stimulus to increase demand, next year there will be real demand, which is healthier and more sustainable. This can be seen as consumers continue to spend money over the holidays.
At the same time, the U.S. economy will create two to three million jobs, according to Doll, as unemployment falls to 9%.
Meanwhile, 2011 will see improvements in risk assets and equities as the U.S. economy continues to grow.
“By the close of 2011 , the S&P 500 index will be at 1,350-plus, a target that implies that the market will appreciate at least in line with corporate earnings,” Doll said. The S&P 500 index finished 2010 at 1,257, an increase of over 15% from a year earlier.
Doll’s equity market expectations for this year are similar to 2010, the noticeable difference being that he expects more market risk in the new year. He predicts stocks will outperform cash and bonds.
On the interest rate front, Doll said that he sees the accelerating economy, resumption of job growth, and revival of business investment as a case for higher interest rates.
In 2011, Doll expects the United States to outperform the MSCI World Index, a significant turnaround given that the U.S. competed with Japan for last place on the index for the last decade. He predicts that the United States, Germany and Brazil will outperform Japan, Spain and China, with the U.S. performance marked by the improving quantity and quality of growth, increasing confidence and accelerating job growth.
At the same time U.S. corporations will remain strong. Strong balance sheets and free cash flow will lead to significant increases in dividends, share buybacks, mergers and acquisitions and business reinvestment.
But much can still go wrong, Doll warned, including credit problems, commodity price increases, inflation fears, a greater than expected rise in interest rates and currency and capital flow concerns leading to protectionist trade wars.
Doll also worries that the strength of the market return since August may mean the equity markets have bounced back too quickly. “I do have a concern that the exceptionally strong returns we have seen over the last couple of months may mean we “borrowed” some of 2011’s returns in late 2010,” Doll said. “The upside possibilities could lead to stock market appreciation of 10% to 20% more than we expect. The downside issues could result in low double-digit percentage loss.”