Bob Doll, chief equity strategy at the world’s largest money management firm BlackRock, spoke to Bloomberg TV’s Trish Regan and Adam Johnson on “Street Smart”. Doll said that he thinks equity valuations will grow stronger and “at S&P 1550, stocks would still not be expensive…If Europe continues to heal and the Middle East doesn’t blow up, 1550 is do-able.” Excerpts from the interview can be found below, courtesy of Bloomberg Television.
Bob Doll’s predictions for the stock market:
“This isn’t a year about economic growth or earnings, it’s all about the probability of the left tail risk. How afraid are people? When the stock market yields the same as a ten-year Treasury, people are invested in a very afraid manner. My view is that this year is when fear dissipates some, the crisis premium comes out, the risk premium comes out and that means interest rates move up, spreads narrow and equity valuations move up.”
“Our target coming into the year was S&P 1350 plus because our prediction was a double-digit gain in stocks. If Europe stays in the background and behaves itself, we could see a whole lot of the plus and this could be a great year for equities.”
“We’re not changing our target. We could see 1550, and our target will still be accurate. It’s all about Europe, if that left tail risk dissipates. At S&P 1550 stocks would still not be expensive…If Europe continues to heal and the Middle East doesn’t blow up, 1550 is do-able.”
On why market volume is so low:
“There’s still a lot of cash on the sidelines waiting to come in….I’m being a bit extreme, but I think stocks are the place to be. At some point we’ll get a pullback, we’ll get a sloppy period as things will go sideways, you’ve seen the mini-corrections and they last about one day and half because there’s some many people are waiting for a pullback.”
On what equities to invest in:
“I still think having a cyclical orientation – meaning you want to own technology, some energy, but I’m not afraid to buy some healthcare either to get some defense in the portfolio. What you really want is companies with good free cash flow.”
On bank stocks:
“We have more [bank] banks than we did six months ago, but still not a big weighting there. While they’ve done well, I’m still concerned about where the revenue growth is coming from, what’s the regulatory environment means. [The stress tests] were certainly a positive step in the right direction, but stress tests are all about credit…For earnings to grow, it’s not going to be about less bad news, but where’s the revenue growth?”
On interest rates impact on stocks:
“For me, it’s about the pace of increase rather than the level. If we go up 10 basis points per day, as we did early this week, I’m going to get scared fast, but if it’s slow but steady as I’m expecting, not a problem at all. Stocks are still cheap relative to bonds.”
“In a zero interest rate environment, at the short-end, 2 percent for a 10-year Treasury and very little inflation, 14 times growth for the S&P is cheap.”
“We’re up 30% since the low of October 1st – for six months, that seems pretty quick for me. I think some people are just praying for a pull-back so they can put some money in.”
On QE3:
“I don’t think we’re going to get QE3 if the U.S. economy is growing anywhere close to 3% and unemployment is falling. That’s hardly the condition for an emergency, and QE3 is for emergencies. We don’t have one, so I think it’s on the back burner… The Fed’s been a little bit more forward about that and markets have hung in there. For the bears among you, we’re appreciating at a slower rate. We’re a little overbought. We’ll get a correction, but a correction could just be time without much change in price.”
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