The same morning of BlackRock's [see profile] big announcement [see article], one of the New York-based asset manager's key officials took the stage at an industry conference.
Bob Doll, chief investment strategist for
fundamental equities at BlackRock, spoke at Fund Forum 2010 at Marriott Long Wharf in Boston. He made no mention of Bank of America or PNC in his talk, though.
Doll shared his outlook for the equities market. He thinks
the results of yesterday's election -- which gave the
Republicans control of the House, with the Democrats
keeping a slim majority in the Senate -- will not
fundamentally alter the outlook for continuing market
gains. At the same time, he thinks a divided government could pose challenges for further market and economic recovery (see the press release issued by BlackRock this morning below).
"The key issue for Washington in the near term is the Bush
tax cuts," Doll said.
Other short- and long-term concerns include ongoing credit-related issues, deflationary pressures, high deficits and a still-weak economy.
Company Press Release
NEW YORK, Nov 03, 2010 --Post-Election Bump? Markets Historically Do Well In Months Following Mid-Terms
--New Congress Needs to Resolve Lingering Tax Questions, Look Ahead to Deficit Reduction
The outcome of the 2010 mid-term Congressional elections -- a more-than-60-seat swing by the Republicans to give them control of the House with the Democrats narrowly retaining a slim Senate majority -- will not fundamentally change the outlook for continuing equity market gains, but "divided" government could pose challenges for further market and economic recovery, according to Robert C. Doll, Chief Equity Strategist for Fundamental Equities at BlackRock.
"When it comes to market performance, fundamentals historically have proved to be far more important than politics," Doll said. "However, this year, the election results and the political backdrop probably matter more than they usually would. If the current government is not able to come together and address the serious short- and long-term economic problems facing the country, these problems will almost certainly escalate."
Doll commented on Tuesday's election results in a special BlackRock report released this morning. Over the long term, modest levels of economic growth should be enough to allow corporate earnings to continue to make gains and push markets higher, irrespective of the political environment, he believes.
"Valuations appear attractive to us and we expect the prevailing economic environment to be bumpy, but conducive to decent market performance going forward," he said. "Nothing that has happened on the political scene has changed any of that."
At the same time, Doll cautioned that continuing economic and market challenges will demand government attention. "Many believe that divided government can be good for the markets and the economy, since divided governments are less able to 'meddle' in the free markets," he said. "Sometimes this can be true, but we do not believe that now is one of those times."
Concerns for both the short and the long term include a still-weak economy, ongoing credit-related issues, lingering deflationary pressures, structural imbalances (including high deficits) and the pending scheduled expiration of the Bush tax cuts, he said.
""We hope that Washington will be able to take the necessary steps -- such as some meaningful incentives for jobs creation and capital formation -- to support the economy's short term recovery. We also believe the government needs to work on long-term deficit reduction." Doll said. "Absent such steps, the economic backdrop could sour and the environment for equities could turn less friendly."
Removal of Election "Uncertainty"
One immediate and positive result of the elections is the removal of uncertainty over the political and regulatory backdrop, which has been a modest drag on the stock market, Doll said.
"In the 112th Congress, it will be extremely difficult to pass the same sort of wide-ranging reforms that took place in the 111th," he said. "Rightly or wrongly, this sort of backdrop is viewed as more market-friendly by most corporate boards and CEOs, who should be more willing to put capital to work -- a positive for the equity markets."
Industry Impact: Election's Outcome Favors Healthcare, Financial Services, Traditional Energy, Defense
Though Doll believes that the long-term market outlook remains reasonably positive, the specific political impact of the 2010 elections across industry sectors will likely vary.
Sectors likely to do relatively better in a more Republican-dominated Congress include healthcare and in particular health care services companies, financial services companies, traditional energy companies, and defense.
"Although it is extremely unlikely that the healthcare reform bill will be completely overturned, some elements of it could be slowed and possibly amended by the new Congress," Doll said. "Similarly, while prospects remain for additional financial regulatory reform, a more Democratic-oriented Congress would have pushed harder for it, so financial services companies are now likely to benefit on a relative basis."
In the energy sector, offshore drilling companies in particular should benefit from a friendlier Congress. In contrast, with a reduced focus likely on such issues as climate change and global warming, alternative energy companies will not do quite as well.
The defense budget is likely to come under pressure no matter who controls Congress, Doll said, but that pressure should be relatively less in the 112th Congress, offering some benefit to defense and national security-related companies.
The outlook is more mixed for manufacturing and infrastructure related companies, and for the retail sector. "Within both parties, protectionist trade sentiments are running high," Doll said. "While protectionist policies could benefit traditional manufacturing in the short term, they also act as a net detractor to global economic growth."
Doll also noted that while President Obama and Congressional Democrats have had a strong focus on infrastructure improvements, with their power now diminished, the pending environment could be modestly more difficult for infrastructure-related companies.
With tax policy now likely to be friendlier to higher-income Americans, higher-end retailers should do better, while mass-market retailers will probably see a more difficult environment.
History's Lessons: Stocks Typically Do Well Following Mid-Terms
Apart from the fundamental factors supporting equities, market history also suggests that stocks may be in for a good run over the next year. "Investors should not make too much of historical trends, but the period from right before through many months after a midterm election is historically the strongest time for equities in the four-year election cycle," Doll said.
According to recent research by J.P. Morgan, the markets historically have gained an average of 1.4% in the lead-up to the mid-terms, and then 14.7% on average over the next six months and 16.7% over the next 12 months, as measured by performance of the S&P 500 Index around mid-term elections from 1920 to the present.
Another historical trend shows that the third year of a President's term -- in this case, 2011 -- has been the strongest from an equity markets perspective, according to an analysis of annual S&P 500 performance from 1928 to 2009 by Strategas Research Partners.
Recent history also seems to suggest that, before long, investors will need to consider the possible impact of the coming 2012 elections on the investment landscape. "In recent years, politics seem to have become more contentious -- and the election season longer and longer," Doll said. "There's only a limited window of opportunity for the government to enact new legislation -- and address our critical short- and long-term economic problems -- before the 2012 elections overshadow everything else."
Tax Policy Looms Large
Taxes -- both the prospects for the Bush-era tax cuts as well as tax policy's longer term direction -- are the primary economic and political issue for most investors, Doll said.
"We hope that the Congress and President Obama will not simply let all of the tax cuts expire without any action at all, since this would act as a de-facto tax increase -- and increase the probability of a double-dip recession in the U.S.," Doll said.
Doll believes the most likely outcome would be for the government to defer the longer-term question for now, vote in the current Congress' lame-duck session to extend nearly all of the cuts for a limited time (probably for at least a year) and then take up the issue again in 2011.
Regardless of the future of the Bush cuts, the government will have to find a way to reduce deficits going forward, Doll said. Possible solutions include increasing some taxes for higher-income Americans, expanding taxes on corporations, raising payroll taxes and taxes on foreign-sourced earnings or adjusting the Alternative Minimum Tax. Additionally, the government will likely have to find ways to reduce spending levels, including entitlement spending reforms, he said.
"Americans should expect at least some tax increases in the years ahead," Doll said. "This would represent a modest, but not insurmountable, headwind for stocks."
BlackRock is a leader in investment management, risk management and advisory services for institutional and retail clients worldwide. At September 30, 2010, BlackRock's AUM was $3.446 trillion. BlackRock offers products that span the risk spectrum to meet clients' needs, including active, enhanced and index strategies across markets and asset classes. Products are offered in a variety of structures including separate accounts, mutual funds, iShares (exchange traded funds), and other pooled investment vehicles. BlackRock also offers risk management, advisory and enterprise investment system services to a broad base of institutional investors through BlackRock Solutions. Headquartered in New York City, as of September 30, 2010, the firm has approximately 8,900 employees in 24 countries and a major presence in key global markets, including North and South America, Europe, Asia, Australia and the Middle East and Africa. For additional information, please visit the Company's website at www.blackrock.com.
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