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BlackRock What's Ahead in 2011

BlackRock What's Ahead in 2011

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Published by mm18881

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Published by: mm18881 on Jan 10, 2011
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What’s Ahead in 2011
An Investment Perspective: Year-End Summary and Market Outlook
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A Review o 2010:
It was rocky, but 2010 goes into the history books marking a secondconsecutive year o double-digit returns or equities. 
See page 3.
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Defation and Infation:
Over the coming years, we expect defationary and infationary orcesto become more balanced, but we are not anticipating an increase in the ed unds rate in 2011. 
See pages 3 & 4.
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The Outlook or 2011:
Our overall call or the coming year is that it should look somewhat similarto 2010 — but with the risks balanced more to the upside than was the case last year. 
See page 5.
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The Scorecard or Our 2010 Predictions:
Most o the predictions we made one year ago cameto pass, although we ell short on a couple. 
See pages 6 & 7.
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10 Predictions or 2011:
We oer 10 new predictions about the economy and nancial marketsor the coming year. 
See pages 8, 9 & 10.
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Investment Opportunities:
At this juncture, we recommend investors continue to overweightequities, and to ocus on opportunities in US markets in particular. 
See page 11.
Bob Doll
Chie Equity Strategist,Fundamental Equities
Not FDIC Insured • May Lose Value • No Bank Guarantee
 
“Muddle through” was one o the phrases we used repeatedly throughout 2010to describe our expectations or the US economy, along with our orecastthat stocks would “grind higher.” This turned out to be a pretty accuratedescription o events last year. We entered 2010 calling or a year-end S&P500 Index target o 1,250, right around where the index actually wound up(1,257). For the coming year, we are orecasting a similar environment, butperhaps one that is slightly better — call it “muddle through; grind higher plus.”Last year, we thought our 1,250 number represented a pretty good guess,but were concerned that we might have been too optimistic. In 2011, we arecalling or a year-end S&P 500 landing point o around 1,350, or higher. Thiswould represent roughly the same percentage gain as in 2010. The wrinklewe would add this time, however, is that we think we may be too pessimistic.In other words, in 2010 we thought the risks were primarily to the downside,while in 2011 we believe the risks are primarily to the upside.We enter the New Year with condence levels improving, with the outlookor growth accelerating and with defationary risks shrinking. The corporatesector is in solid shape, and is positioned to deliver another year o strongearnings. Monetary policy will eventually normalize, but or the oreseeableuture, it should remain quite easy. The economy will hardly be robust, butgrowth levels (and the quality o growth) should improve over the coming year.Infationary threats are all but invisible in most parts o the developed world.In all, the backdrop suggests that risk assets (particularly stocks) should bein or another strong year.
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Executive Summary
 
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A Look Back at 2010
A Year in Three Acts
A year ago at this time, we made the orecast that cyclical stimulus would beat out structural problems.This turned out to be a good representation o what actually happened, and over the course o theyear, risk assets continued the choppy advance they began in 2009. In some sense, there were threeparts to 2010. The early months saw risk assets move higher as they continued the 2009 asset recoverystory, helped by preliminary signs o employment improvements and very strong ourth quarter2009 and rst quarter 2010 earnings. The middle months o 2010 saw a double-digit percentagecorrection on the back o the Greek sovereign debt crisis and a stalling in jobs growth, leading toears o a double-dip recession. Investors were also unnerved by the May “fash crash” and theuncertainty surrounding the nancial reorm bill. Nevertheless, ater touching a late summer low,the market experienced a very strong nish to the year (US stocks advanced more than 20% romtheir August lows through the end o the year) as double-dip ears receded, jobs growth resumedand the US midterm elections results were perceived to be capital markets riendly. Additionally,Federal Reserve President Ben Bernanke delivered his amous Jackson Hole speech, leading to asecond round o quantitative easing measures (QE2) and, perhaps most importantly, the Bush-eratax cuts were extended and supplemented with some scal sweeteners.Regarding the economic backdrop, debt and defationary risks remained present throughout 2010,causing central banks (especially the US Fed) to respond with unprecedented actions. Real grossdomestic product (GDP) growth continued in a positive direction but remained subpar compared tomost recoveries on the historic record. In the United States, jobs growth was not strong enough toreduce the unemployment rate. Corporations, however, managed to notch antastic earnings gainsdespite mediocre economic growth. Infation remained a non-issue in the developed world, butbegan to rear its ugly head in some emerging economies. Government decit spending and debtlevels continued to haunt investors, but corporate nancial health remained remarkably strong inboth balance sheet and income statement terms.US stocks ended the year up double-digit percentages, and the S&P 500 closed at close to our1,250 target, outpacing most developed markets and many important emerging markets. Still, theyear saw investor assets fow out o equity unds (especially US equities) and into bond unds as theinsatiable thirst or income continued. Overall, equity market movements were choppy in 2010 , butultimately a double-digit percentage gain goes into the history books.
From Defation to Infation (Eventually)
One o the main themes that dominated the global economy in 2009 was the competing orces odefation and infation, and 2010 saw a continuation o that battle. Over the past ew years, defationaryrisks have obviously dominated, but there has been evidence o infationary pressures in somemarkets (most obviously in China), and we have seen infation in the orm o rising commoditiesprices. With the high degree o excess capacity in labor and manuacturing, however, it is almostimpossible to imagine widespread infation taking hold any time soon. Recent data shows infationremains muted, and the Federal Reserve’s launch o QE2 demonstrated that, i anything, the Fed istrying to promote higher levels o asset price infation.
 A year ago at this time,we made the orecast that cyclical stimulus would beat out structural problems.This turned out to be a good representation o what actually happened, and over the course o the year, risk assets continued the choppy advance they began in 2009.US stocks ended the year up double-digit percentages,and the S&P 500 closed at close to our 1,250 target,outpacing most developed  markets and many important emerging markets.With the high degree o excess capacity in labor and manuacturing, it isalmost impossible to imaginewidespread ination taking  hold any time soon.

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