The theme for 2010 is that cyclical stimulus beats out structural problems, which will mean that economic growth is above trend but below a normal recovery, equities outperform, and the U.S. outperforms the rest of the developed world, Doll said. The market during 2010 will be driven primarily by gains in corporate earnings and real advances in the economy and not by global policy action, liquidity issues, or relief that the world has avoided a depression, he noted. “Some long-term structural negatives are dampening the economic acceleration that usually accompanies a recovery,” he said. “Chief among these are ongoing consumer deleveraging; a banking system facing deteriorating loan quality and an increasing yet uncertain regulatory environment; securitization markets still largely shuttered, and a real estate market that may still be healing for several years.” The U.S. economy, after contracting by 2% to 3% during 2009, will experience real growth of somewhere in the 3% range, Doll predicted.
Doll said his overall economic/market view for 2010 is positioned somewhere between today’s most bullish observers—who are calling for a strong rebound—and and the most bearish—who are predicting that the nascent pickup in growth will fizzle and that the United States is headed for the type of stagnation that plagued Japan in the 1990s.
Although it is now clear that stocks were extremely undervalued during the heart of the credit crisis, today they are generally fairly priced, according to Doll. Healthcare, information technology, and telecommunications are among Doll’s favored market sectors for 2010.
10 Predictions for 2010
- The U.S. economy grows above 3% in 2010 and outpaces the G-7.
- Job growth turns positive in the United States early in 2010, but the unemployment rate remains stubbornly high.
- Earnings rise significantly despite mediocre economic growth.
- Inflation remains a non-issue in the developed world.
- Interest rates rise at all points on the Treasury curve, including fed funds.
- U.S. stocks outperform cash and Treasuries, and most developed markets.
- Emerging markets outperform as emerging economies grow significantly faster than developed regions.
- Healthcare, information technology and telecommunications outperform financials, utilities and materials.
- Strong free cash flow and slow growth lead to an increase in M&A activity.
- Republicans make noticeable gains in the House and Senate, but Democrats remain firmly in control of Congress.
“In summary, 2010 is likely to be a year of continued modest cyclical recovery, countered by the structural problems that continue to face most of the developed world,” Doll said.
Over the next 10 years, Doll predicted that although the U.S. will witness positive equity returns, it will also see more frequent recessions. Further, during the coming decade, the emerging markets will become an even stronger market and economic force. “World economic growth will be led by emerging market consumers,” Doll said. “The political and economic ascent of China will continue. On the other hand, an aging and declining population will give Europe some of the problems that Japan has recently experienced.”
In addition to his annual year-ahead predictions, Doll also offered a series of predictions for the next 10 years:
- U.S. equities experience high single digit percentage total returns, in the range of 6% to 8% annually, after the worst decade since the 1930s.
- Recessions occur more frequently during this decade, rather than only once a decade as occurred in the last 20 years.
- Healthcare, information technology, and energy alternatives are leading growth areas for the United States.
- The U.S. dollar continues to become less dominant as the decade progresses.
- Interest rates move irregularly higher in the developed world.
- Country self-interest leads to more trade and political conflicts.
- An aging and declining population gives Europe some of Japan’s problems.
- World growth is led by emerging market consumers.
- Emerging markets weighting in global indexes rises by 10 percentage points.
- China’s economic and political ascent continues.
Doll also provided a recap of his predictions for 2009. “Much has changed in the economy and the markets since we made our 2009 predictions one year ago,” Doll said. “The global economy experienced a nasty recession, but policymakers were able to stave off widespread deflation. Equity markets rebounded strongly, but remained highly volatile.”
“In all, a look back at the predictions we made last year shows that the economic and market
backdrop played out surprisingly close to the way we expected,” Doll said (see "BlackRock’s Doll Predicts Good, But Not Great, 2009" and "BlackRock’s Doll: Stocks on Track to Post Double-Digit Gains").
In fact, Doll said 11 of last year’s preductions were correct, and one of them was half-correct. The prediction Doll gave himself half-credit for was “U.S. stocks outperform European stocks while emerging markets outperform developed ones.” Although Doll admitted he got the emerging markets half of this prediction correct, as those regions have seen some of the most impressive market gains for the year, he said he was incorrect in calling for U.S. stocks to outperform their European counterparts.