| BlackRock Investment Commentary - 31-08-2010 |
| 31.08.10 10:16 | ||||||
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Stocks endured another down week last week, but thanks to a rally on Friday, the losses were trimmed. For the week as a whole, the Dow Jones Industrial Average lost 0.6% to 10,151, the S&P 500 Index fell 0.7% to 1,065 and the Nasdaq Composite declined 1.2% to 2,154. There was some positive economic news last week, including initial jobless claims, which were less than expected. That number fell to 173,000 from 504,000 the prior week. Additionally, signs have been emerging that lending standards are easing somewhat. The Federal Reserve’s senior loan officer opinion survey showed that overall standards have been becoming less stringent and small bank lending has been increasing — a necessary ingredient for a broadening recovery. The economic highlight last week was a speech by Fed Chairman Ben Bernanke, who provided a fairly dovish outlook in his comments. Chairman Bernanke made it clear that more easing would be in store unless the economy improves. His statements should help ease some fears among investors who remain concerned about the possibility of a double-dip recession. His reasons for optimism included ongoing monetary policy accommodation, the improvement in consumer balance sheets, the stabilization of bank lending standards mentioned above and a general improvement in financial conditions that are becoming more supportive for growth. To be sure, there are a number of downside risks and the economy remains quite fragile. In particular, one aspect of the economy that remains troubling is the lack of business, consumer and investor confidence. On the whole, we believe that the economy is continuing to go through a deleveraging phase (particularly on the part of the consumer), but we maintain our view that the US economy is unlikely to experience a double dip and that the global economy will not slide back into recession. To us, one of the more interesting features of the current economic and market landscape has been the continued resilience of the corporate sector in the midst of weak economic data. The growth in corporate profits and the ongoing decline in corporate credit spreads are forecasting economic strength. In fact, corporate profit margins as a percentage of GDP are near 40-year highs. During a normal economic cycle, such levels would encourage companies to spend more on capital expenditures and/or ramp up hiring plans, but most companies have remained reluctant to reduce their cash levels. We have seen some increases in capital spending, but a lower amount than would normally be expected given current profits, and, of course, private sector hiring has remained anemic. Some of this reluctance to spend can be attributed to uncertainty surrounding potential legislative and regulatory changes coming out of Washington, but we believe that we are at a point where companies will need to either accept slower growth levels or begin to put more of their capital to work. For the past several months, stocks have been caught between the crosswinds of a range of positive and negative forces. On the bullish side, strong corporate profits, increases in merger and acquisition activity, high levels of corporate debt issuance and some renewed spending on capital expenditures show that the corporate sector remains a source of strength. Additionally, the Fed has made it clear that it will continue to do what it can to remain accommodative. Outside of the United States, economic data also continues to be somewhat stronger than expected through most of Europe and Asia. 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 of Merrill Lynch Investment Managers.
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