Market drawdown presents buying opportunities, says BlackRock’s Bob Doll

Bob Doll, chief Equity Strategist of Fundamental Equities at BlackRock believes that 2011 does not necessarily serve as a model for developments in 2012.

Once again, risk assets struggled last week with most investors blaming the downturn on re-ignition of concerns over the European debt crisis brought about by a disappointing debt auction in Spain. For the week, the Dow Jones Industrial Average fell 1.6% to 12,849, the S&P 500 Index declined 2.0% to 1,370 and the Nasdaq Composite dropped 2.3% to 3,011.

Does History Repeat? Or Just Rhyme?

Last year around this time, stocks were coming off an impressive first quarter, but
were headed for trouble. Higher oil prices, the earthquake in Japan and the brouhaha over the US debt ceiling all conspired to cause a sharp turnaround in risk assets. So far this year, stocks have been following a somewhat similar pattern as early strength for equities appears to be fading somewhat. So, it is worth asking the question: Will 2012 look like 2011?

There are some aspects of the financial and economic backdrop that do look similar
between the two years. In addition to the flare ups in Europe regarding debt problems, we are currently in the midst of a period of rising energy prices. Gasoline prices in particular are getting close to last year’s peaks. We are also seeing some renewed weakness in the economic data-the pace of jobs growth slowed in March and consumer confidence levels have been looking softer. Should gasoline prices continue to rise, it would be reasonable to fear that the spillover effect onto the rest of the economy would worsen.

We believe it would be a mistake, however, to look too closely to 2011 as a model for what might happen this year. For starters, current expectations for both the economy and the markets are worse than they were at this point last year. In early 2011, investors were pricing in a better economic environment than what would ultimately come to pass. In contrast, at this point we believe that markets are already priced for relatively modest levels of growth, suggesting that there is less room for downside disappointments. Additionally, the fundamental strength of the economy is better now than it was one year ago. Notwithstanding last month’s data, the labor market is stronger than it was, housing appears to be bottoming and US credit conditions have been improving. Finally, it is important to remember that the recovery and market strength last year were, to some extent, derailed by the natural disasters in Japan and by S&P’s credit downgrade of the United States. While external shocks are always a risk, we can hope that these sorts of factors will not be repeated.

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