BlackRock’s Doll turns cautious

July 19, 2011

BlackRock’s Bob Doll, one of the most heavy weight U.S. equity managers, has signaled a new note of caution on the U.S. economy, warning that if growth does not start to pick up in the second half of the year then it will be time to cut back on equity exposure.

Wherefore this new found reticence from Doll, who has been solidly bullish this year? Like many other investors, the first half economic slowdown caught Doll on the hop. He now believes the U.S. economy is at a critical juncture and investors need to be especially vigilant going into the second half.

U.S. growth in the first half of the year now looks like it will come in under 2 percent. Doll points out that since 1960, every time year-over-year growth has dipped below that level the United States has gone into recession.

So has Doll finally turned bearish? No. He expects the recovery to continue, particularly now that gasoline prices have fallen and the drag from supply disruptions from Japan’s earthquake is fading. But the economy is not out of the woods yet, Doll argued in a research note to clients.

Although it is not our baseline view, the possibility that growth will falter in the second half of the year is a real risk. Our bottom line view is that investors should maintain a reasonably constructive bias toward risk assets, but should also be prepared to scale back exposure if evidence of economic growth acceleration does not materialize.

Entering into the second half, Doll will be looking out for improved manufacturing data, declines in unemployment claims, increases in hours worked, more positive corporate earnings and a further pickup in bank lending. If those fail to come through it may well be time to hit the ‘sell’ button.

BlackRock is a big, big fish with something in the order of $1.6 trillion in equities under management. Doll, and others like him, are the market. No one from the small fry to the plankton wants to be in the way of the big fish when they start moving. That means the stock market is likely to stay just as volatile and data-driven in the second half of the year as it has been of late.

This offers plenty of opportunities to profit – either by timing the market or picking up bargains – but given the added uncertainty, investors need to stay tuned in, manage risk, and watch out for the Dolls of the world.

 

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