FEARS ARE RECEDING, From Bob Doll, vice chairman and chief equity strategist, BlackRock

Equity markets advanced for the second consecutive week as fears of contagion from the European sovereign debt crisis continued to recede somewhat. For the week, the Dow Jones Industrial Average climbed 2.4% to 10,451, the S&P 500 Index advanced 2.4% to 1,118 and the Nasdaq Composite rose 3.0% to 2,310.

Many observers continued to express concerns about the possibility of a double-dip recession that could derail the current bull market. True double-dip recessions are very rare, and would require a significant shock to demand levels, which we do not think will occur. What we do believe we have been witnessing is a pullback in growth momentum and a decline in risk appetites—events that are normal during economic recoveries.

There are several risks facing the global economy, and almost all of them are policy or politics-related, including the European debt crisis, the risks of regulatory reform, the implementation of austerity measures, Chinese policy tightening and the inflation/deflation debate inside the United States. On balance, we continue to believe that the economic recovery is on track, but we acknowledge that the downside risks to consumer and business confidence levels have become more elevated over the past couple of months.

We expect volatility and uncertainty levels will remain high for some time. Our interpretation of the recent rebound is that investors have become slightly more confident that the macro risks have not yet manifested themselves in a serious manner. Additionally, equity market valuations  have become more attractive, especially when compared to alternatives. The forward price-to-earnings ratio of the S&P 500 recently fell to around 13 times, its lowest level since 1995. Compared to the extremely low yields being offered by Treasuries, many investors have decided that stocks have become more attractive. Regarding earnings, forward expectations for 2011 may be too optimistic, but for the rest of this year, we think they are reasonable.

First-quarter earnings advanced at close to $78 per share, and should come in somewhere around $82 for all of 2010. Looking ahead, we expect that 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 more clear and the slowdown in Chinese growth should result in a soft landing. The uncertainty surrounding European sovereign debt remains the chief wild card. Policymakers have made some progress in terms of obtaining funding and cutting some deficits, but much hard work (both economically and politically) still remains and the ultimate end game remains uncertain.

NURSING A PRECIOUS EXPANSION, From David Kelley, chief market strategist, JPMorgan Funds

The week ahead should be a relatively quiet one for economic data, with much of the focus being on China’s decision over last weekend to allow for increased “flexibility” in the Yuan’s exchange rate, next weekend’s G-20 summit in Toronto and the Fed’s mid-year FOMC meeting.
 
Numbers due out this week should continue to be on the soft side, as has been the case in recent weeks. Existing Home Sales for May could still be up from April levels while May New Home Sales could be down. The reason for the discrepancy is that existing sales are generally counted as the sale closes (and could thus be still elevated by the now expired home-buyer credit) as opposed to the numbers on new home sales which are reported upon the signing of a contract, an activity which was already probably being curtailed in May.
 
Durable Goods Orders could look uninspiring, as a sharp fall in orders from Boeing in May could cut the headline number. Ex-Transportation Orders should look stronger. Unemployment Claims will be watched closely, following a number of disappointing weeks. Less critical will be a second revision to First-Quarter GDP numbers and Friday’s Consumer Sentiment Report, both of which should show little change from earlier estimates.
 
China’s currency move has been broadly welcomed, although the Chinese are clearly signaling that they only intend the Yuan to appreciate gradually. Perhaps more important is the signal it sends about China’s willingness to play a constructive role in the global economy in advance of the G20 summit next weekend. Given the array of economic and geopolitical threats facing the major developed nations, this is obviously to be welcomed.
 
Given all of this, the Fed is very unlikely to change its policy stance at the FOMC meeting on Tuesday and Wednesday. Since their last meeting on April 28th, they have witnessed the European financial crisis intensify and then ease, as well as watching the U.S. stock market slump and then partially rebound. While the economic numbers aren’t as healthy as they would like, the U.S. remains in a gradual recovery.
 
As the Fed maintains its bedside vigil, all they can promise is what they have promised for some time, namely to maintain a steady dose of low interest rates for a long-time. Indeed, the fragility of global financial markets and the softness in U.S. economic data now suggest that they may not contemplate a rate hike before early 2011. Some have argued that they will postpone rate hikes even further. This may be the case, but the Fed is pragmatic, and their timetable will still be subject to the strength of incoming data.
 
For investors, the important thing is not to get too tied up in the minutia of Chinese exchange rates, home-buying credits, or even Federal Reserve adjustments. A gradual recovery in the U.S. and global economies should push both long-term interest rates and stock prices higher and it is important to be positioned to benefit from this broad theme rather than be victimized by it.