Week in Review

Let's look at the numbers.

In the last week the S&P 500 gained as much as it did in the whole First Quarter (0.6%). The stock market has bounced back and year-to-date has generated a 3% return (S&P 500). Mid Caps are still outperforming Large Caps domestic stocks. Large Caps are now keeping up with Small Cap stocks after lagging for years. Growth is beginning to outperform value stocks reversing a long standing trend. The market volatility of late February and early March does not seem to be having a lasting impact on the market.

Despite this performance, the market is facing uncharted waters. Here are
Bob Doll's opinion of the state of the economy and particularly corporate earnings growth. He is Vice Chairman and Global Chief Investment Officer of Equities at BlackRock.

Last week was a good one for stocks, with the Dow Jones Industrial Average posting a 0.4% gain to close at 12,612, while the S&P 500® Index climbed 0.6% to 1,452 and the Nasdaq® Composite rose 0.8% to 2,491. Currently, the S&P 500 Index is on pace to end the year with a 8.5% gain, which would be broadly in line with our view that stocks should experience a reasonably constructive year.

Expectations for U.S. economic growth have continued to fade over recent weeks. At present, the consensus view is that gross domestic product (GDP) growth will come in at a 2.0% rate for the first quarter and around 2.4% for the second quarter. Expectations for the second half of the year currently peg economic growth at around the 2.5% to 3% level, but those numbers have been trending downward as well. There are some negatives in the global economic picture right now, but they are primarily concentrated in the United States (with the most notable being the housing slump). Weaker U.S. economic growth, combined with slowing corporate profit growth, has caused some to worry about the possibility of a recession. In our opinion, however, these fears are unfounded. Resilient income growth, jobs growth and employment levels are helping to keep the U.S. economy from slowing too much, and growth outside the United States continues to be strong. These factors should be enough to prevent the U.S. economy from sliding into a recession.

It is a tricky time for investors right now given all of the crosscurrents in the economy, so we thought it would be useful to take a look at some of the most important trends. First, we believe the U.S. economy will continue to grow at a below-trend level for at least another two or three quarters before returning to a somewhat higher rate of growth. Second, we think it is important to recognize that the world has shifted from a time when the U.S. consumer was the key engine of growth to a more broad-based set of stimuli — an environment that is more constructive for global financial markets. Third, we believe inflation will remain at reasonably low levels, but we recognize that inflation worries will persistently flare up given the backdrop of strong world growth and ongoing high energy prices. Fourth, we believe the U.S. dollar will remain somewhat weak given diverging economic growth prospects around the world. Finally, we expect global interest rates to remain relatively low.

So what does all of this mean for equities? The combination of slower economic growth and weaker corporate profits tells us that we are likely to see continued choppiness in trading levels, and additional corrective action is not out of the question. However, we continue to believe that attractive valuations should help stock prices to move higher over the course of the year. Additionally, although the Federal Reserve does not appear inclined to make any interest rate changes at present, we do believe that as evidence of slowing economic growth continues to mount, the central bank will begin cutting rates in the second half of the year, which would be a further benefit to stocks.