Stocks Are Taking a Breather from the Rally
BlackRock Investment Management
By Bob Doll
October 3, 2012
Markets Advance Pauses
After being flat to slightly down two weeks ago, stocks declined last week, with the
Dow Jones Industrial Average falling 1.1% to 13,737, the S&P 500 Index dropping 1.3%
to 1,440 and the Nasdaq Composite slipping 2.0% to 3,116.
To at least some extent, the pause in the rally we have seen over the past couple of weeks can be attributed to some profit-taking on the heels of a significant multi-month uptrend (US stocks rose close to 6% in the third quarter). It is also likely, however, that investors are coming to grips with the fact that the world continues to face some serious risks and are recognizing that not all of the world’s problems can be solved by central bank action.
Economic Growth Likely to Remain Muted
Economic data was mixed last week. On the negative side, second-quarter gross domestic product growth was revised lower from 1.7% to 1.3%, confirming that the
United States was in the midst of a soft patch earlier in the year. The big positive
surprise, however, was the much-larger-than-expected increase in consumer
confidence (likely helped by rising home prices). Higher levels of confidence are critical
in terms of driving longer-term growth, since they can promote gains in consumer
spending, which, in turn, can lead to better jobs growth, creating a self-reinforcing cycle.
There are still some significant drags on economic growth, including a weak jobs market, only modest levels of capital spending by companies, uncertainty about the
political and fiscal future of the United States, and concerns about growth in Europe
and China. Despite the headwinds, our guess is that the US economy should be able
to grow somewhere around 2% for the foreseeable future. The drag from housing has
turned into some positive movement; private sector jobs creation will continue (if
slowly) and consumer spending should be steady to the upside at a slow pace.
Outside of the United States, we believe the ongoing European debt crisis will continue
to exert strong deflationary pressure on the global economy. The programs launched by
the European Central Bank should help contain the crisis, but will not do much in terms
of promoting economic growth. We expect that Chinese growth may bottom in the fourth
quarter, but any upturn will be modest since the eurozone crisis has cut deep into
Chinese export markets.
Stocks Still Look Attractive, but a Consolidation is Likely
With economic growth almost everywhere at below-normal levels and many regions
plagued by enormous fiscal challenges, it is easy to make a bearish case for risk
assets, including stocks. The primary positive factor underlying equities appears to be
the concerted actions of central banks to help stabilize the global financial system. So
far this year, the positive forces have been winning out, but to many, the rally in risk
assets is looking tired.
In our view, we do believe that the market does need to take some time to digest the gains that have been made in the last several months. Whether that takes the form of some sideways action that would allow fundamentals to catch up or some sort of
pullback is debatable, but it would be unreasonable to expect a string of uninterrupted
gains in the coming months. That said, however, we do think that the positives
outweigh the negatives over the longer term and as we have stated in the past, we
expect that stocks will outperform Treasuries and cash over the next twelve months.
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 October 1, 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
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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.
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