BlackRock’s Bob Doll: The recovery is on track

The following is a weekly investment commentary by Bob Doll, vice chairman and chief equity strategist for fundamental equities at BlackRock Inc.

Stocks advanced for the second consecutive week, with the Dow Jones Industrial
Average rising 3.0% to 10,402, the S&P 500 Index advancing 3.1% to 1,109 and theNasdaq Composite climbing 2.8% to 2,244.

Despite some mixed data over the past couple of months, our view is that the global economic recovery remains on track, both in developed and emerging economies. In the United States, manufacturing, production and business sales figures have risen over the past six months at their strongest rates since the early 1980s, but we have yet to see real improvements in jobs or income growth. The snow storms that paralyzed large areas of the country in February probably mean that the current month’s numbers will be sluggish as well.

Nevertheless, the Institute for Supply Management Manufacturing Survey climbed to its highest level in five years in January, and business sales have been increasing, all of which suggest that corporate profits (and, eventually, the labor markets) should see improvements in the coming months.

In terms of housing, price indicators have been running noticeably above their recession lows in recent months, and we would argue that this translates into a bottom forming for the housing market.
In Japan, the economy has been growing robustly, helped largely by industrial production gains. The situation in Europe has not been as encouraging as debt issues have continued to surface, but we do expect this region to see improvements over the coming months. On balance, it appears the global economic recovery that began in mid-2009 has continued in the early part of 2010.

Late last week, the Federal Reserve announced a 25 basis point hike in the discount rate (the rate the Fed charges banks to borrow directly from the central bank) from 0.5% to 0.75%. The Fed tried to emphasize that this increase was unrelated to its broader strategy of maintaining easy monetary policy and restated its long-held mantra that the Fed Funds rate would remain historically low “for an extended period.”

In any case, it does seem clear that the Fed has begun its exit strategy in terms of removing some stimulus, although at this point we would not expect to see an increase in Fed Funds before the end of this year. In related news, inflationary pressures receded last week on data showing that consumer price numbers have remained relatively tame. There was an uptick in producer price inflation, but, overall, inflation has remained under control.

As of now, we have seen two weeks of stock market increases, which have put indices roughly at the mid-point between their January highs and their early February lows. Sentiment remains mixed, with market participants showing little conviction in either direction.

The main downside risk continues to be concerns over unresolved leverage and debt issues around the world. We maintain our view that the long-term economic backdrop should be conducive to continued better performance by risk assets, though we believe deflationary pressures and technical factors are likely to keep markets in a trading range over the short term.

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