predictions 2011

8/7/2019 Predictions 2011

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Contact:Lauren Trengrove Jessica Greaney212-810-3665 [email protected] [email protected]

Predictions for 2011 by BlackRock’s Bob Doll:

US STOCKS WILL RECORD3

rdSTRAIGHT YEAR OF DOUBLE DIGIT GAINS

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Market Risks Will Be “To the Upside”As Improving Economic Growth,

Consumer/Business Confidence Boost Stocks ____________________________

US Real GDP Will Hit All Time High in ’11,Marking Economy’s Transition from Recovery to Expansion

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Stocks Will Outperform Bonds and CashAs Flows to Equities Accelerate ___________________________

New York, January 5, 2010 –- US stocks in 2011 will record a third straight year of double digitpercentage returns, the first time this has occurred in more than a decade, according to Robert C.Doll, Chief Equity Strategist for Fundamental Equities at BlackRock, Inc. (NYSE: BLK).

In the new year, risk assets in general and equities in particular will draw strength from continuedimprovement in US economic growth—in particular, a more sustainable growth path—coupled withimproved business and consumer confidence, and a less hostile capital markets attitude inWashington, D.C., according to Doll. “By the close of 2011, the S&P 500 Index will be at 1,350-plus, a target that implies that the market will appreciate at least in line with corporate earnings,”Doll said. The S&P 500 Index closed out 2010 last Friday, Dec. 31, at 1,257, rising over 15% forthe year.

“Our expected gains for the equity markets for 2011 are not much different from what we expected

for 2010,” he said. “What’s different for 2011 is that market risk will be more to the upside than wasthe case in 2010.”

The possible upside factors include an acceleration in jobs gains, a surprise in real GDP, earningsexceeding expectations as occurred in 2010, and Washington D.C. beginning to address thenation’s fundamental debt and budget problems.

On the other hand, Doll’s “what can go wrong?” list includes the possibility of credit problemsresurfacing (including US housing, sovereign nations, and state and local governments),commodities price increases causing profit margin pressure, inflation fears, a greater thanexpected rise in interest rates, undue emerging markets tightening to curb asset bubbles, andcurrency and capital flow concerns leading to protectionist trade wars.



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Additionally, Doll indicated that the magnitude of the market return since the August 2010 lows (USstocks rose over 20% from mid August through the end of the year) means equity markets mayhave come too far, too quickly. “I do have a concern that the exceptionally strong returns we haveseen over the last couple of months may mean that we ‘borrowed’ some of 2011’s returns in late2010,’ Doll said.

“The upside possibilities could lead to stock market appreciation of 10% to 20% more than weexpect,” Doll said. “The downside issues could result in low double-digit percentage loss.”

US Real GDP Hits All Time High in 2011

Doll has been publishing his annual “10 Predictions” for the year ahead in the financial markets andthe economy for over a decade.

In 2011 the ongoing cyclical recovery will continue, Doll believes, but economic growth will continueto proceed at a less-than-normal pace due to the structural problems that continue to face most ofthe developed world.

In the United States, although the recovery remains subpar, real GDP will move to new all time

highs sometime during 2011’s first half, Doll said. “Real final sales will increase from around 2% toalmost 4% as the impact of the government stimulus program and inventory restocking wanes,” hesaid. “The good news is that this kind of growth is more sustainable and therefore ‘higher quality.’

“Hitting a new high for real GDP also means, of course, that the economy will have moved into atruly expansionary mode,” he said.

In this environment, the Federal Reserve is unlikely to increase interest rates in 2011. “Assumingour growth outlook is correct, the Fed is likely to keep rates at near-zero through the year, althoughwe think it’s possible that by the end of 2011 the futures curve may begin to price an increase intothe markets,” Doll said.

Unemployment Dips to 9 Percent

Job growth also will improve as 2011 progresses, with unemployment falling to around 9% from thecurrent 9.8% rate. “We believe the removal of the Bush tax cut uncertainties and the fears of adouble dip recession as well as improved confidence will lead to more hiring,” Doll said.

The likely employment trend in 2011 is historically associated with solid market performance, Dollsaid. “Compared with any other time, equity market returns have been most ebullient whenunemployment rates have been high and falling,” he said.

Stock On Pace to Outperform Bonds, Cash

As they did in 2010, stocks will outperform both bonds and cash in 2011, Doll said.

“Stocks pulled ahead of bonds in 2010’s fourth quarter, and we expect that trend to continue in2011,” he said. “Interest rate risk will be to the upside, given accelerating economic and job growth,the revival of business capital investment, the likelihood that bonds inflows will slow, and fadingdeflation fears.”

Because the recovery remains “sub par,” the Federal Reserve will likely remain accommodative,which will probably result in some further steepening of the yield curve, Doll believes. Equities arelikely to take over from fixed income as the preferred asset class, both in terms of priceappreciation and investor flows.

US Markets Set to Continue Their Dominance



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In an outcome that surprised many, the United States was one of the world’s strongest markets,and US stocks outperformed the MSCI World Index in 2010—a trend Doll expects will bemaintained in the new year. “Strong balance sheets and free cash flow income statements willlikely lead to significant increases in dividends, share buybacks, merger and acquisition activity,and business reinvestment,” he said. “Companies delivering earnings with solid growth prospectswill likely lead the way, as high intra-stock market correlations continue to fall.”

At the same time, differences between developed and emerging markets will be less pronounced in2011 than before, Doll believes. “The gap between higher growth rates in the developing world andthe lower ones of the developed world will likely shrink somewhat in 2011, causing continued lessdifferentiation in equity returns.”

Predictions for 2011

Here are Doll’s predictions for 2011 with his full commentary on the key trends.

1. US growth accelerates as US Real GDP reaches a new all time high.

Not only is US growth likely to be stronger in 2011 than it was in 2010, but more importantly,the quality of growth will improve. Economic growth in 2010 was based heavily on government

stimulus and inventory rebuilding. Both of these factors will be less significant in 2011 than theywere in 2010, meaning final demand is going to make up the slack. In particular, we believethat real final sales will increase from around 2% to almost 4%. This sort of growth is healthierfor the economy and more sustainable. Additionally, we believe that economic growth in 2011will be supported by an increase in money growth, a steeper yield curve and easing creditconditions. Nominal gross domestic growth in the United States already reached a new all timehigh in 2010, and we expect real GDP growth to also reach a new high at some point duringthe first half of 2011. Despite this outlook, however, we would caution that growth levels will stillremain below trend.

2. The US economy creates two to three million jobs in 2011 as unemployment falls to 9%.

We expect improved job growth as 2011 progresses, finally making some dent in theunemployment rate. Our prediction represents a clear acceleration over the 1 million plus

number of new jobs that were created in 2010 and, in effect, would represent a doubling in therate of jobs growth. It takes approximately 125,000 jobs per month to accommodate newentrants into the labor force and our view is growth will be noticeably higher than that,averaging 175,000 to 250,000 per month. We believe the removal of the Bush tax cutuncertainties and the fears of a double-dip recession as well as improved confidence will leadto more hiring. Leading indicators of hiring, including hours worked, productivity, initial joblessclaims and profitability all point to more jobs. We note with interest that new hiring plans on thepart of corporations have improved as well. Historically, equity market returns have been mostebullient when unemployment rates have been high and falling than at any other time.

3. US stocks experience a third year of double-digit percentage returns for the first time inover a decade as earnings reach a new all time high.

The last time the stock market had three annual double-digit percentage gains in a row was the

late 1990s. Our view is a double-digit percentage return again for 2011 is certainly possible.We expect earnings growth to continue to be better than economic growth, stocks arereasonably inexpensive and confidence levels are improving. We are using a 1,350 target as afloor for our 2011 S&P 500 forecast, which is consistent with expected earnings gains. Ourview is that the risks in 2011 are more to the upside when compared with the downside risks of2010 meaning that, if anything, our 1,350 target may be overly conservative. Should businessand consumer confidence levels continue to improve, if credit problems remain manageableand if politicians remain reasonably capital markets friendly, then we could see some valuationimprovements, which could push market prices even higher. Regarding the earningscomponent of this prediction, operating earnings per share achieved an all time high of $91.47for the S&P 500 in June 2007, and we believe corporate earnings will exceed that number



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sometime around the middle of 2011. We note that in recent months earnings revisions haveagain turned positive after faltering in mid 2010.

4. Stocks outperform bonds and cash.

While stocks did outperform bonds and cash in 2010, it wasn’t until the fourth quarter thatstocks pulled ahead of bonds. We expect that environment to continue in 2011. Assuming that

stocks have any sort of positive return in 2011, they will outperform cash investments, sinceshort-term interest rates (and cash returns) are essentially stuck at just over 0%. The biggerquestion is bonds, but we believe that interest rates are likely headed higher given acceleratingeconomic and jobs growth, the revival of business capital investment, the likelihood of bondfund inflows slowing and deflation fears fading. At present, there is still a wide gap between theS&P 500 earnings yield and BAA corporate bond yields in favor of stocks, and we expect thatgap to close somewhat in 2011 as stocks outperform bonds.

5. The US stock market outperforms the MSCI World Index.

Before 2010, there was a multi-year pattern in which the MSCI World Index outperformed USstocks. In a surprise to many, that streak ended last year with US stocks beating the MSCIWorld Index in 2010 by nearly 400 basis points. We think 2011 will mark the second year of USoutperformance. Compared with the rest of the world, the United States is benefitting from

more fiscal and monetary stimulus, and has a more innovative economy and better earningsgrowth prospects, all of which should help US stock market performance. We also expect thatemerging market economies will perform well, but that the gap between emerging anddeveloped economies is likely to narrow in 2011 (which should also help US stocks on arelative basis). In other markets, we expect Europe will continue to struggle with credit andsovereign funding issues and Japan’s secular growth problems will likely remain.

6. The US, Germany and Brazil outperform Japan, Spain and China.

2010 was a year in which geographic allocations played an important role in determininginvestors’ overall portfolio returns, and we think 2011 will see a continuation of this trend. Fromour perspective, we favor markets that have evidence of accelerating economic momentumand low levels of inflationary threats. We also prefer to avoid markets that are facing significantcredit risks. As a result, we are predicting that a basket of US, German and Brazilian stockswould outperform a basket of Japanese, Spanish and Chinese stocks. As we indicated in ourfifth prediction, there are a host of reasons to favor US stocks, including its improving qualityand quantity of economic growth. Germany is exhibiting strength in manufacturing and exportsand Brazil is benefitting from a rapidly growing middle class and solid consumer spendinglevels. On the other side of our equation, Japan is suffering from persistently slow growth andSpain has a troubled banking system and ongoing credit woes. Regarding China, we expecteconomic growth will remain strong, but that market is in the midst of a tightening cycledesigned to combat inflation—an environment that does not bode especially well for marketperformance.

7. Commodities and emerging market currencies outperform a basket of the dollar, euro andyen.

As long as global growth is at least reasonably strong (as it was in 2010), commodities pricesshould appreciate in 2011. We believe that oil could top $100 per barrel at some point duringthe year due to better macro demand and continued inventory declines and since gold is “theonly currency without debt,” gold prices are likely to move higher over the course of the year(albeit at a slower pace and more irregularly than it has over the past couple of years.Additionally, industrial commodities such as copper should benefit from continued globalgrowth and urbanization in emerging markets. As we indicated earlier, we expect the growthdifferential between emerging market countries and developed markets will narrow in 2011, butwe remain preferential toward emerging market currencies over a basket of the dollar, euroand yen.



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8. Strong balance sheets and free cash flow lead to significant increases in dividends, sharebuybacks, mergers & acquisitions and business reinvestment.

Corporations in America are doing very well. Balance sheets are strong and incomestatements are showing high levels of free cash flow. This backdrop led to high levels of M&Aactivity and business reinvestment in 2010, and in the year ahead we are calling for double-digit increases in dividends, buybacks, M&A and business reinvestment. We believe the key to

getting this prediction right is for business confidence to improve, signs of which becameevident toward the end of 2010. In addition we would argue that unlocking the 2+ trillion dollarsof cash on corporate balance sheets is a significant key to better and more sustained US GDPgrowth.

9. Investor flows move from bond funds to equity funds.

Should the economic and market backdrop play out as we expect, we should see fixed incomeflows slow and equity fund flows pick up materially in 2011. This would reverse a multi-yeartrend in which investors have been embracing bond funds and shunning equity funds. Indeed,we began seeing this reversal happen in the fourth quarter of 2010 when equities began tonoticeably outperform fixed income. Flows tend to follow prices, and we would expect thatduring the course of this year, we will see a noticeable slowdown in bond fund flows and theswitch into equity funds. The “era of fear” that we have seen in equities in the last couple of

years is in contrast to the “era of greed” we saw in the late 1990’s.

10. The 2012 Presidential campaign sees a plethora of Republican candidates whilePresident Obama continues to move to the center.

Election seasons seem to grow longer every cycle, and already there appears to be a long listof potential GOP presidential candidates. While it is impossible to know exactly who will run,our view is that many will declare their intention to run for president during 2011. Meanwhile,after a very difficult election for President Obama in November of last year, his move towardthe political center is likely to continue as he attempts to be more business- and capitalmarkets friendly. It is clear that elections are decided by independents and the President needsto increase his support within the independent ranks significantly in order to have a chance forreelection.

The 2010 Scorecard

In 2010, risk assets continued the choppy advance they began in 2009. “The S&P 500 ended theyear up a double-digit percentage and close to our 1,250 target, as US stocks outpaced mostdeveloped markets and many important emerging markets,” Doll said.

Real GDP growth continued in a positive direction but remained subpar compared with mostrecoveries. In the United States, jobs growth was not strong enough to reduce the unemploymentrate. Inflation remained a non-issue in the developed world but began to rear its ugly head in someemerging economies. Government deficit spending and debt levels continued to haunt investorsbut corporate financial health remained remarkably strong both in balance sheet and incomestatement terms. “Corporations produced fantastic earnings gains despite mediocre economicgrowth,” Doll noted.

“To sum it up, although we missed on a couple of the predictions made one year ago, most didcome to pass,” he said.

1. The US economy grows above 3% in 2010 and outpaces the G-7.

Score = Correct

Although final fourth-quarter growth numbers will not be available for a while yet, economistsare currently revising their estimates upward, and it looks like GDP will have grown in thefourth quarter by around 3%. Also, it is looking like US growth for all of 2010 should just clearthe 3% hurdle. Among other G-7 countries, other than Canada, no other country’s growth levelwill surpass that of the United States.



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2. Job growth in the United States turns positive early in 2010, but the unemploymentrate remains stubbornly high.

Score = Correct

It would have been almost impossible to have phrased this prediction any better, since this

exactly described what happened on the labor market front in 2010. Employment growth didturn positive toward the end of the first quarter, but gains were not strong enough to lower theunemployment rate.

3. Earnings rise significantly despite mediocre economic growth.

Score = Correct

When we made this prediction at the beginning of the year, our point was that earningsimprovements would outpace the broader improvements in the overall economy, and that isexactly what came to pass. In many ways, the degree to which corporate America weatheredslow levels of economic growth, ongoing credit issues and a still-troubled financial system wasquite a surprise.

4. Inflation remains a non-issue in the developed world.

Score = Correct

While there have been some inflationary concerns in areas of the developing world, for thedeveloped markets, deflationary pressures persisted through 2010. We acknowledge that inthe years ahead, inflation may become a concern given high deficits and some of the structuralproblems facing the United States, but such an environment is not likely to develop in the nearfuture.

5. Interest rates rise at all points on the Treasury curve, including fed funds.

Score = Incorrect

This is a prediction that we will have to mark in the “incorrect” column for this year. Some might

say that we were not exactly wrong on this call, but just early since interest rates have begun toclimb strongly over the last several weeks. For the year as a whole, however, credit concerns,quantitative easing and deflationary issues pushed the yield curve lower. On the fed fundsfront, rates are likely to remain lower for some time, and we have no expectation that the Fedwill raise the fed funds rate at any point in the coming months.

6. US stocks outperform cash and Treasuries, and most developed markets.

Score = Correct

The broad asset class call we made at the beginning of the year has come to pass. With USequity market returns well into the double-digits, US stocks handily outperformed Treasuries(which came in at less than 10%) and cash (which returned just over 0%). With few exceptions,US stocks also outperformed other developed markets.

7. Emerging markets outperform as emerging economies grow significantly faster thandeveloped regions.

Score = Correct

Economic growth in emerging markets has been much stronger than in the developed world, andemerging markets on balance have outperformed. The degree of outperformance, however, wasnarrower than we expected.



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8. Healthcare, information technology and telecommunications outperform financials,utilities and materials.

Score = Incorrect

This is a prediction that came down to the wire, as going into the last week of the year we were slightlyin the “correct” column on this one. Unfortunately (for our predictions scorecard) we were wrong onthis call, if only barely, since a basket of healthcare, information technology and telecommunications

stocks very slightly underperformed a basket of financials, utilities and materials stocks.

9. Strong free cash flow and slow growth lead to an increase in M&A activity.

Score = Correct

Strong free cash flow and strong balance sheets allowed companies to put their cash to workby ramping up merger-and-acquisition activity. Dividend increases and share buybacks alsoincreased strongly this year.

10. Republicans make noticeable gains in the House and Senate, but Democrats remainfirmly in control of Congress.

Score = Half-correct

We got the first part of this sentence correct, but the second part wrong, since Republicans did, ofcourse, take over the House of Representatives. In retrospect, there was a much larger non-incumbent wave that dominated the midterms than we expected.

Final 2010 Scorecard:Correct: 7Half-Correct: 1Incorrect: 2Total: 7.5/10

Opportunities for Investors

The start of a new year is always a good time to review your investment goals and asset allocationwith your financial professional, and to make portfolio changes where necessary. With that in mind,following are some ideas investors may wish to consider:

• Retain equity overweights: A combination of supportive fiscal and monetary policy,decent economic growth, low inflation, strong corporate earnings and decent valuationsshould be a recipe for stock prices to move higher in 2011. As such, we would recommendretaining overweight positions in equities relative to cash and bonds.

• Focus on free cash flow: One of our primary investment themes for the coming year will

be to focus on companies that have high levels of free cash flows, and we are seeingopportunities across capitalizations, investment styles and geographies. At the same time,we think investors need to hold a mix of both high-quality and cyclical stocks in theirportfolios.

• Think about geography: As indicated by our overall market outlook and our specificpredictions, we expect US stocks to continue to outperform most other global markets. USeconomic growth should be stronger than almost any other developed market, as shouldcorporate earnings growth. At the same time, it remains important to keep some allocationto better-positioned international markets, including emerging markets.



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• Stay with commodities: Gains will likely be uneven, and volatility in the commoditiesmarkets is likely to remain high, but long-term investment in commodities continues tomake sense.

• Remember that gains will be harder to come by: In many ways the “easy money” in thisbull market has already been made. The year ahead will likely see ongoing volatility and

heightened dispersion between the winners and the losers. In this sort of environment,selectivity will be critical.

About BlackRock

BlackRock is a leader in investment management, risk management and advisory services forinstitutional and retail clients worldwide. At September 30, 2010, BlackRock’s AUM was $3.446trillion. BlackRock offers products that span the risk spectrum to meet clients’ needs, includingactive, enhanced and index strategies across markets and asset classes. Products are offered in avariety of structures including separate accounts, mutual funds, iShares (exchange traded funds),and other pooled investment vehicles. BlackRock also offers risk management, advisory andenterprise 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 approximately8,900 employees in 24 countries and a major presence in key global markets, including North andSouth America, Europe, Asia, Australia and the Middle East and Africa. For additional information,please visit the Company's website at www.blackrock.com.

International investing involves additional risks, including risks related to foreign currency, limitedliquidity, less government regulation and the possibility of substantial volatility due to adversepolitical, economic or other developments. The two main risks related to fixed income investing areinterest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding declinein the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will notbe able to make principal and interest payments. Investments in commodities may entail significantrisks and can be significantly affected by events such as variations in the commodities markets,weather, disease, embargoes, international, political and economic developments, the success of

exploration projects, tax and other government regulations, as well as other factors. Indexperformance is shown for illustrative purposes only. You cannot invest directly in an index.

The opinions presented are those of Bob Doll, BlackRock Chief Equity Strategist for FundamentalEquities, as of January 1, 2011 and may change as subsequent conditions vary. Individualportfolio managers for BlackRock may have opinions and/or make investment decisions that may,in certain respects, not be consistent with the information contained in this press release. Thismaterial is not intended to be relied upon as a forecast, research or investment advice, and is not arecommendation, offer or solicitation to buy or sell any securities or to adopt any investmentstrategy. The information and opinions contained in this material are derived from proprietary andnonproprietary sources deemed by BlackRock

® to be reliable, are not necessarily all inclusive and

are not guaranteed as to accuracy. Past performance does not guarantee future results. There isno guarantee that any forecasts made will come to pass. Reliance upon information in this materialis at the sole discretion of the reader.

©2011 BlackRock, Inc. All Rights Reserved.

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