BlackRock's Bob Doll Expects U.S. Equities to "Grind Higher" in 2008'S Second Half, with Help of Global Growth, Stronger Earnings, Moderating Inflation

Business Wire, June 30, 2008

Doll's Predictions Include:

U.S. Continues to Avoid Recession; GDP Growth To Stay "Mired" in 0-2% Range

Worst of Credit Crisis Now "Behind Us," With Investors Returning to Some Market Sectors

U.S. Could Outperform Other Developed Markets This Year; Selected Emerging Markets Remain Attractive Complement To Domestic Stock Holdings

NEW YORK -- Though the U.S. economy continues to face risks, the sense of "crisis" that was prevalent earlier in the year seems to have faded, and stock prices should "grind higher," albeit with continued volatility, as 2008's second half proceeds, according to Robert C. Doll, Vice Chairman and Global Chief Investment Officer of Equities at BlackRock, Inc. (NYSE: BLK).

Doll and BlackRock's Global Equity portfolio management group believe that although a number of potential risks remain, the longer term outlook for stocks, while rocky, is generally positive.

"Stocks hit an important low in mid-March, and although they moved higher throughout much of April and May, they have suffered a recent setback in the face of higher oil prices, worries about inflation, ongoing credit issues and a still weak economy," Doll said in his annual mid-year update and outlook for the economy and financial markets. "Despite all of the negative sentiment currently dominating markets, we believe a backdrop of still decent global growth, accommodative monetary and fiscal policies in the United States, strength in the non-financial corporate sectors, an improving earnings environment and moderating inflationary pressures should provide the basis for further gains.

"At the beginning of the year, we advised investors to remain cautiously optimistic - and the advice still holds," Doll said. "We remain in a lower return/higher volatility environment, which means that when it comes to equity investment, a focus on quality and careful security selection will continue to be all-important."

Doll believes that although the current economic slowdown is likely to persist, we are probably past the worst of the "crisis" phase. "Consumers remain under pressure and businesses are likely to stay defensive, but monetary and fiscal authorities are determined to keep policy stimulative and to seek additional ways to ease the credit and housing crunch," he said.

U.S. GDP growth will remain "mired" in a 0% to 2% range for some time, Doll said, and the U.S. economy will continue to avoid recession. "We do not believe that the U.S. economy is headed for recession," he said. "Recessions typically occur when the excesses of an economic expansion receive a sudden jolt. The problem with the recession argument this time is that, outside of the credit market, excesses in the U.S. - such as an excessive buildup in inventories - have largely been absent."

Worst of Credit Crisis Now "Behind Us"

Credit conditions have improved over the past few months, but problems persist in several areas including the mortgage, leveraged loans and auction rate markets, and many financial firms remain under pressure, facing credit downgrades, shrinking earnings, continued balance sheet de-levering and the possibility of additional write downs.

"It would be premature to suggest that the credit crunch is behind us," said Doll. "Nevertheless, we do believe that the worst of the crisis is behind us. The massive rate cuts by the Federal Reserve, combined with the central bank's more creative actions - such as opening the discount window directly to securities dealers - have gone a long way to easing credit conditions. Investors are slowly becoming more risk tolerant and opportunities are emerging in some distressed areas of the market."

Inflation Likely to Ease in Coming Months

Inflation levels in the U.S. are currently above the Federal Reserve's comfort level, Doll noted, a fact that the Fed acknowledged when it recently signaled a likely end to the current interest rate cutting cycle. "The main question now is whether the slowdown in economic activity will be sufficient to ease cyclical inflation pressures and bring inflation back inside the Fed's comfort zone," he said.

"While it seems clear that higher food and energy prices are putting upward pressure on inflationary levels, in our view, inflation is likely to ease somewhat over the balance of 2008," Doll said. "While headline inflation rates have been high, core inflation remains reasonably well contained, and we expect inflationary pressures in the U.S. to diminish in the months ahead, particularly since the credit squeeze and housing bust are both deflationary forces, and the economy continues to operate below potential."

Fed Will Probably Stand Pat On Rates

Despite fears that exceptionally high energy prices will eventually cause core inflation to rise, Doll expects the Fed to maintain the Fed funds target rate at 2.00% for the foreseeable future, given the headwinds currently facing the economy.

"The Fed has indicated that it sees the risks to growth remaining on the downside, but sees the risks to inflation turning to the upside. As a result, and barring some major shock, we think the FOMC will likely be reluctant to ease the fed funds target rate further this year," Doll said. "Although the market is pricing in the possibility of multiple 25 basis point hikes by the Fed by the end of the year, we do not believe the Fed will deliver these hikes as quickly as the markets expect given the pessimistic outlooks for consumer spending and housing as well as forecasts pointing to a continued sluggish U.S. economy."