One on One with Robert Doll, Vice Chairman & CIO of Black Rock
Monday, January 08, 2007
|
|
|
|
SUSIE GHARIB: Our guest tonight says the major stock averages will have another good year, but not as strong as 2006. That's one of the 10 predictions for the New Year from Robert Doll, vice chairman and chief investment officer of Black Rock. When I talked with him a short while ago, I asked him about his market outlook.
ROBERT DOLL, VICE CHAIRMAN & CHIEF INVESTMENT OFFICER, BLACK ROCK: Our view, Susie, is that the soft landing will happen, that is to say, the growth in the economy in the U.S. will slow enough that inflation fears, to the extent they still exist, recede, but not so much that earnings growth is any slower than mid single digits. The soft landing -- and that means equities should do OK.
GHARIB: Let's go over your predictions, Bob, for 2007 and by the way, congratulations on predicting seven out of 10 correctly in 2006.
DOLL: Thank you.
GHARIB: For 2007, first you're saying the U.S. economy slows to 2, 2.5 percent. Give us more of your analysis.
DOLL: Our view it is will be a below-trend year in economic growth for the U.S., Susie and the reason is, housing is a problem. It is slowing things from what might have been 3 percent down to that 2 to 2.5 percent level but it stays great outside the U.S.
GHARIB: As you mentioned a moment ago, prediction number two, profits do slow down. You were wrong about this in 2006. Why do you think they're still going to be slow in 2007?
DOLL: Between a slowing economy, difficult comparisons and record profit margins, all that tells us earnings growth should be positive in '07 but only single digits finally.
GHARIB: Prediction three, the yield curve reverse with short rates following long rates going up. So what does this tell us about the Federal Reserve for 2007?
DOLL: It tells us if the soft landing is right, inflation is not a particular problem. The Fed will be lowering interest rates in the second half of '07 allowing short rates to move down simultaneously. We think long rates will move up some but not a lot.
GHARIB: Now prediction four, stocks rise by 8 to 10 percent. You said a moment ago an OK year. Why just OK?
DOLL: Well, we've had a number of good years in a row and as we said, earnings growth is slowing. If earnings growth slows to call it 5 percent, we'll still need some multiple or valuation improvement in order to get to that 10-ish sort of level. We think that is certainly possible, but investors need to extend time horizons and feel comfortable for that to happen.
GHARIB: Prediction five, large cap stocks outperform small caps, a prediction you made last year and you weren't quite - you were a little early on that. And looking ahead to number six that energy, health care and information technology are the top performing sectors. Give us your analysis there.
DOLL: Certainly large companies in this rally of the last few months have started to do better than small cap. We think more of that for sure in '07. Large cap and higher quality tend to do better when economic growth and earnings growth slows. Additionally for earnings and valuation reasons, we like energy, technology and health care.
GHARIB: All right. Let's talk about the dollar which is your prediction number seven, declines to its lowest level in a decade. You were right on that call in 2006 as well. Is this a negative for the markets?
DOLL: If it's slowing gradual, Susie, no and that's our expectation. The dollar sold off during the course of '06, but it was slow and many days imperceptible. If that happens again, everything will be just fine. It's the more severe decline in a quicker way that would be a problem. We don't foresee that.
GHARIB: Now you say Japan is going to be the best stock market performer around the globe. Why Japan?
DOLL: Of major economies, we think that's the case. Japan's market lagged as did its economy in '06. We think the country is spending a lot of money to try to become competitive. We think they will be successful, earnings growth there likely to be double digits in 2007. Valuations are reasonable. We think the equity market there does better.
GHARIB: Let's jump ahead to your last prediction, number 10, where you say populist politics experience a renaissance. Is that good or bad for the stock market?
DOLL: Most likely it's a gray cloud. Let's call it that, Susie. The reason I'm saying not black is because we don't expect a lot of legislation around populism. That being the case, we think that there will be a lot of talk out of Congress about trade restrictions, protectionism. No one will use that language but that's how it will come out, raising the minimum wage, attacking CEO pay. They're the things that are on the list of populist politics, all of that to watch carefully for the '08 elections. We think it's a gray cloud for '07.
GHARIB: Bob, thank you so much, a very interesting list of predictions and we'll check in with you mid year to see how you're doing.
DOLL: Thanks, Susie.
