Bob Doll, Blackrock’s Chief Equity Strategist understands the risks that confront this market, but he doesn’t believe they can derail the bull market. Not yet at least. The primary risks include deleveraging, Fed policy, rising interest rates and taxes.
Doll says the Europe deleveraging issues are probably not solved despite the Greek aid package:
“One of the risks to economic growth and to the equity bull market remains ongoing deleveraging. Over the weekend, eurozone finance ministers agreed to a substantial financing package for Greece, which should help that country’s debt situation, although we continue to believe that other credit problems are likely to surface.”
In terms of monetary policy Blackrock says the Fed is likely to raise rates sooner than many believe. Doll says the Fed will move from their “emergency” stance to a more traditional stance before years end. He thinks the move is likely to come on the back of the improving economic landscape:
“There has also been increasing concern about when the Federal Reserve will increase interest rates. The central bank has maintained a cautious approach, but we believe it will likely move away from its current “emergency” stance before too long and expect to see an increase in the Fed Funds target rate by the end of the year.”
Doll is not concerned about the recent spike in interest rates. He says this is part of the normal recovery process. Yields are rising as the economy improves and investors transition into risk assets:
“On a related note, recent trends in fixed income have some investors worried. Treasury yields have been rising and demand has been weaker at Treasury auctions. It is possible that we are witnessing the start of a bear market for Treasuries; however, our view is that rising yields are mostly a reflection of improving economic conditions and should not be enough to derail the bull market for risk assets.”
Doll’s final market concern is regarding the Bush tax cuts. Doll believes the uncertainty around the tax situation in the United States could pose some second half problems:
“Finally, an additional concern among investors relates to the fate of the tax cuts enacted under President Bush in 2003. These cuts are scheduled to expire on January 1, 2011, and it is unclear what action Washington will take. The uncertainty over tax policy may act as a drag on equities in the second half of this year.”
Despite these risks Doll doesn’t see any reason why equities can’t continue to power higher. He says stronger economic growth and improving corporate profits should bolster the market for the remainder of the year:
“Equity markets have posted impressive performance to date in 2010 as good corporate earnings news and signs of stronger economic growth were able to overcome some broader headwinds, including the Greek debt situation, policy tightening in China and political uncertainty in the United States. We expect that stocks will continue to grind higher over the course of the year and believe that corporate earnings will become the main driver of equity prices.”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.