Where are the markets going?

The current market turmoil shouldn't spoke investors but caution is still warrented. I enjoyed reading Bob Doll's weekly commentary which captures the spirit of current market activity. So here is his Monday commentary in full. Read and enjoy!

The Financial Pragmatist
Libby Mihalka

Weekly Investment Commentary
By Bob Doll is Vice Chairman and Global Chief Investment Officer of Equities at BlackRock
April 9, 2007

The U.S. stock market seems to be following a pattern of one week being up and the next being down; and last week was one of the "up" ones, despite some mixed economic reports (the Institute for Supply Management's manufacturing index declined, while Friday's payrolls report was better than expected). Market sentiment was helped by the resolution over the issue of British sailors and marines being held by Iran as well as by continued high levels of merger-and-acquisition activity. For the week, the Dow Jones Industrial Average gained 1.7% to 12,560, the S&P 500® Index climbed 1.6% to 1,443 and the Nasdaq® Composite rose 2.1% to 2,471.

In our opinion, last week was fairly typical of the type of economic environment we expect going forward—that is, one in which economic growth slows, but not so quickly as to spark a recession. Additionally, we believe that lingering signs of economic strength will disappoint those who are hoping that the Federal Reserve will soon enact rate cuts. We do believe, however, that as economic growth continues to weaken, inflation pressures will recede, which should set the stage for the Fed to begin cutting rates in the second half of this year.

Over the next couple of weeks, investors will shift gears to focus on first-quarter corporate earnings. At present, consensus expectations are for first-quarter earnings growth to be around 3% to 4%, with overall 2007 growth levels to come in slightly below the 7% mark. For our part, we continue to believe that 2007 growth levels will be a bit below that—likely around the 5% area.

One factor that has been helping to push equity markets higher despite evidence of slowing economic and earnings growth has been ongoing corporate deal activity, which has been driven by a combination of high levels of cash available to companies and attractive equity valuation levels. We have been seeing high levels of stock buybacks, mergers and both public and private buyouts. In the first quarter, like the fourth quarter of last year, there was more than $1 trillion of reported deal activity, marking the first back-to-back quarters at that level since 2000. In our opinion, this environment is likely to persist until either the availability of capital dries up or until equity valuations rise considerably.

Looking ahead, we believe that the global economic backdrop remains healthy and conducive to continued good equity market performance. The potential danger of a hard economic landing in the United States remains, although we believe such an event has a low probability of occurring. Over the next few months, we expect markets to remain bumpy as investors digest ongoing news of slowing economic growth and weakening corporate profits growth, but do not believe these events will mark the end of the current bull market.