Doll’s annual predictions regarding the economy and markets for 2011 follow the theme, “Muddle Through/Grind Higher Plus (with risks to the upside).” This means that Doll sees confidence levels improving, growth outlook accelerating, and deflationary credit risks shrinking. “If we get it wrong, it will be that we were too pessimistic,” he said at a press briefing Tuesday morning.
His first prediction is: “U.S. growth accelerates as U.S. real GDP reaches a new all-time high.” Doll said in the coming year, likely sometime in the second quarter, we will exit the “recovery” phase, and enter “expansion,” and that the quantity and quality of the real GDP will rise. However–he emphasized the point that this recovery is still subpar; the economy is moving in the right direction, but it is doing so at lower-than-expected levels. This anticipated subpar recovery was echoed in his second prediction: “the U.S. economy will create 2-3 million jobs in 2011 with unemployment falling to 9%.” It’s a good sign that initial jobless claims have begun to decline, but the unemployment rate is still high for a healthy recovery. Even though his prediction for unemployment is that it will still be relatively high, he commented that the movement downwards is what moves markets, not necessarily how much.
Doll’s third prediction is: “U.S. stocks experience a third year of double-digit percentage returns for the first time in over a decade as earnings reach a new all-time high.” He pointed out that the last time we saw this was in the late 1990s. Doll expects the S&P 500 to reach 1,350+, which would bring a low double-digit total return. However, he pointed out that three year strings of double-digit returns are not that common; this would only be the 10th since the beginning of the S&P 500.
The fourth prediction, related to market performance, is: “Stocks outperform bonds and cash.” Although stocks did outperform bonds and cash in 2010, it wasn’t until the end of the year that stocks pulled ahead of bonds, something that Doll expects will continue in 2011. Assuming that stocks have any sort of positive return in 2011, Doll said, they will outperform cash. Doll believes they will also outperform bonds because he noted that he thinkg interest rates are headed higher, for the following reasons:
- Accelerating economy/resumption of job growth
- Revival of business investment
- U.S. fiscal policy concerns
- Bond fund inflows to slow
- Real rates low
- Deflation fears fading
- Eventual “normalization” by the Fed
Turning to the global picture, Doll’s fifth prediction is, “The U.S. stock market outperforms the MSCI World Index.” For multiple years, the MSCI World Index outperformed U.S. stocks but last year, U.S. stocks by the MSCI World Index by nearly 400 basis points-outperformance Doll predicts will continue because the U.S. is benefitting from more fiscal and monetary stimulus, and has a more innovative economy and better earnings growth prospects.
His sixth, seventh, and eighth predictions were grouped into “basket groups.”
Prediction Six: “The U.S., Germany, and Brazil outperform Japan, Spain, and China.”
Prediction Seven: “Commodities and emerging market currencies outperform a basket of the dollar, euro, and yen.”
Prediction Eight: “Strong balance sheets and free cash flow lead to significant increases in dividends, share buybacks, M&A, and business reinvestment.”
Looking at the investor, Doll predicts: “Investor flows move from bond funds to equity funds.”
And, as he often does, Doll devoted his tenth prediction to Washington. This year, he said, “The 2012 Presidential campaign sees a plethora of Republican candidates, while President Obama continues to move to the center.”
Considering Doll got 7.5 out of 10 of his 2010 predictions correct, it’s not surprising the investment world takes his predictions seriously (see "BlackRock's Doll Makes 2010 Predictions"). His predictions for 2010 were:
- The U.S. economy grows above 3% in 2010 and outpaces the G-7. Correct.
- Job growth in the U.S. turns positive early in 2010, but the unemployment rate remains stubbornly high. Correct.
- Earnings rise significantly despite mediocre economic growth. Correct.
- Inflation remains a non-issue in the developed world. Correct.
- Interest rates rise at all points on the Treasury curve, including Fed funds. Incorrect.
- U.S. stocks outperform cash and treasuries, and most developed markets. Correct.
- Emerging markets outperform as emerging economies grow significantly faster than developed ones. Correct.
- Health Care, Information Technology, and Telecommunications outperform Financials, Utilities, and Materials. Incorrect (but only by a few basis points, Doll noted).
- Strong free cash flow and slow growth lead to an increase in M&A activity. Correct.
- Republicans make noticeable gains in the House and Senate, but Democrats remain firmly in control of Congress. Half correct.