The largest asset manager in the United States remains firmly bullish on the recovery though many risks remain. In his latest strategy note Bob Doll highlighted several of the risks facing the markets at this juncture, but maintains that equity markets have largely priced these risks in.
Nonetheless, they could continue to roil the markets in the coming months, but should not be overreacted towards:
All of this is not to say that the economy and the markets will experience smooth sailing from here. In recent weeks, we have been highlighting some of the down-side risks, including ongoing credit-related issues (chiefly in the euro region) and the possibilities of premature policy tightening (chiefly in China). To these, we would add a slowdown in the rate of economic growth in Asian economies. These markets have been key drivers of global economic growth in recent years, but have been foundering a bit over the last six months. Additionally, we remain concerned about protectionist sentiment from Washington, DC. In all, equity markets have not been overly concerned about all of these risks (an appropriate view, in our minds), but these are trends that continue to bear close monitoring.
Despite the risks, Doll says the U.S. recovery is coming along well and the recession is long behind us. The jobs market is healing and the end of government stimulus is no longer a fear. He expects full blown expansion to resume in the coming year and that this environment will continue to reward investors who are taking risks:
In summary, we believe that the recession probably ended in June or July of last year, and while the jobs market normally lags in a recovery, the lag has been unusually long in this case. Nevertheless, the March payrolls report signaled what we believe is the start of a long-awaited rebound in the employment picture, which should be beneficial for the broader economy. As fiscal and monetary stimulus begins to fade over the coming months, the economy is going to require some self-sustaining mechanisms to kick in, and growing employment levels would certainly be beneficial. Over the course of the next year, we expect that the economy will successfully shift from an economic recovery to an economic expansion. This environment of continued improvement in the economy, combined with still low interest rates and improving corporate profits, represents a sort of “sweet spot” for risk assets. As such, we think it makes sense for investors to continue overweighting equities and credit-related fixed income assets and underweighting cash and Treasuries.