Stocks to move higher, says BlackRock’s Bob Doll

Bob Doll, chief equity strategist of Fundamental Equities at BlackRock, says the rising price of oil will not be enough to put investors off chasing share prices higher.

Equity markets around the world continued to advance last week, again thanks to continued improvements in economic growth and an overall sense that macro risks have been receding. In the United States, stocks rose to new post-credit-crisis highs, with the Dow Jones Industrial Average advancing 2.4% to 13,232, the S&P 500 Index rising 2.4% to 1,404 and the Nasdaq Composite gaining 2.2% to end the week at 3,055.

At the same time, bond prices sank as yields moved sharply higher, with the yield on the 10-year Treasury jumping to close to 2.3% after trading at around 2.0% for several months. Meanwhile, oil and gasoline prices rose again, gold prices fell and the US dollar gained some strength.

Economic Growth Shouldn’t Be Derailed by Higher Oil Price

As we have been saying for the past several weeks, it appears the US economy is improving to the point that it is entering a self-sustaining cycle, helped in large part by advances in the labor market. We have recently been seeing improvements in retail sales (with January’s figures up by 1.1%) and we are expecting that gains in employment will translate into faster income appreciation and additional consumption. One cautionary note is that jobless claims have stopped falling in recent weeks, which suggests that the future pace of jobs growth may be more subdued than we have seen in the past few months.

It is possible that the warm winter weather may have skewed jobs growth to the upside. At the beginning of the year, two of the main risks to global economic growth appeared to be the ongoing European credit crisis and the possibility of a hard landing in China.

While those risks seem to have receded since that point, a new one has emerged: rising oil prices. Since December, oil prices have advanced by roughly $20 per barrel. Our assessment is that roughly half of that comes from growing optimism about the prospects for global growth as well as some supply shortfalls. The other half can be attributed to the risk premium coming from noise in the Middle East and concerns about Iran.

Quantifying the exact impact of the “Iran premium” is extremely difficult since there is a near-limitless range of possible developments that could impact oil prices. The worst-case scenario would be for some sort of military conflict that could disrupt the flow of oil through the Straits of Hormuz, but at this point that seems unlikely. 

In any case, it is important to remember that the current run up in oil prices is still
only about half of what occurred around this point last year, and at present we do
not believe oil prices have risen to the point that they represent a significant threat
to the pace of global growth.

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