Doll: Market Looks Good, But Political Risks Loom

Blackrock’s Bob Doll says he thinks stocks have yet to hit their 2012 highs, but cautions that several factors — especially political issues in the U.S. — could pose a threat to markets.

“Our overall view about the markets is that improvements in the global economic outlook, continued easy financial conditions and slowly improving investor risk appetites are all reasons that stock prices should continue to crawl higher,” Doll writes in his latest market commentary. “Markets have, however, paused somewhat in their rally over the last several weeks. To a large extent, this can be attributed to the fact that prices had risen so far so quickly and we have been saying for some time that markets were overdue for a period of consolidation or correction, but it is also important to emphasize that we believe we will need to see further evidence of economic improvement for gains to continue. We continue to believe that stocks are headed higher from here and do not believe that we have seen the market highs for 2012 yet, but we would caution that the pace of gains is likely to be slower and more uneven than they were during the first quarter.”

Doll says he thinks the labor market will continue to improve as the year progresses, and he notes that the housing market has even been “showing increasing signs of life”. But he sees some potential risks to the market, like rising oil and gas prices. Perhaps the most significant is the risk that U.S. policymakers will fail to address several budget-related concerns. “The United States faces some enormous economic, tax policy and debt-related issues that need to be resolved by the end of 2012, but it is becoming increasingly clear that little or no action is likely to be taken until after the November elections,” Doll says. “There appears to be a general consensus that a lame duck session of Congress in December will become the venue for cobbling together some new economic and tax policies, but there is no guarantee that Congress will be able to act in time to write and pass legislation.”

Congress must “act to extend or redesign the Bush-era tax cuts that are scheduled to expire at the end of this year and to reconsider the budget sequestration that calls for $600 billion over 10 years in cuts for both defense and domestic discretionary spending,” Doll says. If it doesn’t address the tax increases and spending cuts, there’s a good chance another recession could be triggered, he says. He adds that there’s also a good chance Congress will have to act to raise the debt ceiling again before year-end.