'10 Predictions' for 2008: Though Markets Will Remain Volatile, BlackRock's Bob Doll...

Wed Jan 9, 2008 9:10am EST

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'10 Predictions' for 2008: Though Markets Will Remain Volatile, BlackRock's Bob Doll Looks for Equities to Maintain Bull Market Course in '08

  U.S. Narrowly Escapes a Recession, But Credit Issues Will Continue
                      to Stoke Recessionary Fears

    Large Companies, Growth Stocks Will Be Winners in '08; Emerging
              Markets and Economies Will Outperform Again

   Democrats Likely to Sweep Elections, With Potential Impact on Tax
                          and Trade Policies
NEW YORK--(Business Wire)--As credit markets regain their footing and investor confidence
rebounds, equity valuations should improve in 2008, allowing the bull
market to continue, according to Robert C. Doll, Vice Chairman and
Chief Investment Officer of Global Equities at BlackRock, Inc. (NYSE:
BLK). In fact, Doll is predicting that while equities are likely to
remain volatile in 2008 due to above-normal uncertainty and
below-normal liquidity, stocks will reach new record highs at some
point during the upcoming year.

   "While we believe investors will face significant risks this year,
we remain cautiously optimistic overall," Doll said.

   Escaping a Recession a "Close Call" in 2008

   Doll believes that the U.S. will narrowly escape a recession in

   "The economy is weak, but it is still growing, and consumers
continue to spend, albeit at a reduced pace. The labor market has been
under pressure, but remains resilient," he said. "The decline in the
dollar presents risks, but also has served as a catalyst for a boom in

   Escaping a recession will be "a close call," Doll said, since
expected growth over the next few quarters will be well below the
economy's long-term trend. The U.S. housing market remains in a
recession and credit markets continue to experience turmoil.

   "Continued economic growth in the U.S. will require export
strength, reliance on strong balance sheets and income statements
among non-financial companies, avoidance of significant employment
layoffs, and an accommodative Fed. In our opinion, these factors are
more likely to occur than not," Doll said. "The key to our cautiously
optimistic outlook is for the U.S. economy to avoid a slump deep
enough to dampen long-term earnings expectations, which could end
chances for a market re-rating and undermine the global economy."

   Credit Woes Will Continue

   Doll believes that although a recession is not likely,
credit-related issues will continue to stoke recessionary fears over
the next several months.

   "What we are witnessing appears to be the bursting of a credit
bubble, with both supply and demand for credit contracting amid a
general deterioration in loan quality," he said. "To say the bubble
has burst is somewhat imprecise, however, because such bubbles don't
dissipate quickly - they take a long time to unwind. We are likely to
see additional downgrades, write-downs and further evidence of a
weakening economy before all is said and done."

   Large Companies, Growth Styles Favored;

   Performance Differentials Make Stock Selection Critical

   Doll, who has been publishing his annual "Ten Predictions" for the
year ahead in the financial markets and the economy for over a decade,
notes that improved equity market conditions would become especially
evident with well behaved inflation and Fed support.

   "In 2008, large companies and growth will win again, as U.S.
multinationals perform as well as most developed markets," he said.
"As occurred in 2007, stock selection will be a critical factor for
success, as fewer stocks outperform their indices."

   Doll also favors the information technology, healthcare&">healthcare and energy
sectors, while financials and consumer discretionary sectors will
continue to struggle and utility stocks take a breather from their
recent outperformance. "From a geographic perspective, we believe it
is possible that the U.S. will outperform other developed markets, but
emerging markets should once again be the winners," he said.

   Among other asset classes, bond yields are likely to head higher
later in 2008, Doll said, and from a valuation standpoint, equities
remain a more attractive option. U.S. residential real estate will
likely continue to struggle, with evidence suggesting that the housing
recession is not yet over.

   For the past several years, oil prices have experienced upward
price pressure due to ongoing geopolitical tensions, rapid levels of
global economic growth, increases in energy demand and the absence of
significant new supply sources. "The long term case for higher oil
prices remains intact, but a global economic slowdown and some
incremental production should permit some consolidation in oil prices
this year," Doll said. "The prices of other hard commodities could
undergo correction as well in '08, but the long-term outlook for
commodities remains a good one."

   Focus on U.S. Elections Grows

   As the year progresses, focus will grow on the potential impact of
this year's elections on fiscal and economic policy. "The U.S.
presidential election will consume many headlines, and the
implications for investors will center around taxation and trade
policies - neither of which is likely to be resolved favorably for
equities," Doll said.

   Doll noted that most signs point to a Democratic electoral sweep.
"We believe the desire for change and President Bush's unpopularity,
which so dominated the 2006 midterm elections, has a way to go. This
backdrop, combined with the fact that the Democrats have raised more
money than Republicans and what appears to be heightened disarray
among the Republican party, suggests that these elections are the
Democrats' to lose."

   Ten Predictions for 2008

   Here are Doll's "Ten Predictions for 2008" with his commentary on
the key trends. "2008 will hopefully be a year where reflation and
liquidity beat out credit issues and fear," he said.

 1. World growth dips below trend for the first time since 2002.
    World GDP has been growing strongly for the last several years,
     averaging over the long-term trend of 3.5% since 2004. In our
     opinion, this is likely to change in 2008. Weakness should be
     centered in the U.S., particularly in the housing and consumer-
     related areas of the economy. We expect that European economies
     will encounter some noticeable weakness as well. Developing
     markets should continue to experience strong economic growth
     levels this year.

 2. The United States narrowly escapes an economic recession, but
     experiences a profits recession.
    Despite the significant drag from the housing recession and
     related credit problems, we believe that strong corporate balance
     sheets and cash flows, a resilient labor market, still-strong
     exports and an accommodative Fed are important counterbalances
     that should help the U.S. avoid a recession, even if it may feel
     like one at times. Our best guess for U.S. GDP growth in 2008 is
     in the area of 1.5% to 2%. Earnings are more volatile than
     economic growth and have been trending noticeably downward over
     the past couple of quarters. Unfortunately, we believe this
     points to the likelihood of a profits recession in 2008.

 3. The fed funds rate falls to 3.5% or lower as Treasury bond yields
    We expect to see at least another 75 basis points worth of
     reductions in the fed funds target rate, which would bring that
     rate to 3.5% or lower. We expect the central bank to lower rates
     grudgingly. Although we believe inflation should be well
     contained, some inflationary pressures remain (e.g., food prices)
     and Fed officials are mindful that inflation fighting is one of
     their primary jobs. In terms of bond yields, we expect that as
     credit conditions ease and the economy remains on track, rates
     should rise modestly from their current low levels.

 4. The dollar rises against the euro, but falls against developing
     market currencies.
    Since peaking in value in 2002, the dollar has trended downward
     relative to most currencies (notwithstanding a brief uptick in
     2005). Unfavorable interest rate differentials, slower levels of
     economic growth in the U.S. and, of course, the trade imbalance
     have all been putting downward pressure on the U.S. currency.
     While we believe these pressures will continue in 2008, slowing
     European growth and the current high valuation of the euro should
     cause it to fall in value relative to the dollar. Pressure is
     mounting to revalue emerging markets currencies, and should U.S.
     dollar pegs be adjusted, it would result in relative appreciation
     for developing currencies.

 5. Stocks achieve a new all-time high in 2008 as price/earnings
     ratios improve.
    Equity valuations (i.e., P/E ratios) have improved only modestly
     since mid-2006 after experiencing several years of declines. We
     believe there is room for further improvement, particularly given
     our view that earnings are likely to be weak. The combination of
     attractive valuations, positive (albeit slower) levels of
     economic growth, subdued inflation, low long-term interest rates,
     strong corporate balance sheets and an accommodative Federal
     Reserve should help push stocks to a new high at some point
     during the year -- breaking through the records last set in

 6. Large cap and growth outperform small cap and value.
    This prediction represents a continuation of a trend that became
     evident in the latter half of 2007. In our experience, these
     sorts of trends tend to last for several years once they develop.
     In an environment of slower economic growth and weaker earnings
     growth, higher-quality investments should outperform, which would
     point to large caps and growth styles.

 7. Developing economies and equity markets outperform developed ones
     yet again.
    Absent a global recession, we expect developing economies and
     markets to outperform again in 2008. Growing workforces, ongoing
     productivity gains, increasing consumption levels, strong savings
     rates and industrial and technological improvements should all
     continue in developing countries, helping those economies
     continue to thrive. Emerging markets' valuations have moved up to
     approach those of developed markets in recent years, but given
     their higher earnings growth levels, they remain an attractive

 8. Despite rising above $100 per barrel, oil prices end the year
     lower than where they started.
    Ongoing geopolitical tensions, rapid levels of global economic
     growth, increases in energy demand and the absence of significant
     new supply sources have been putting upward pressure on oil
     prices for the past several years. In 2007, oil prices climbed
     57% to end the year at $95.98 per barrel, and, in fact, prices
     did jump above the $100 mark in the first couple of trading days
     of 2008. Although we believe the long-term case for higher prices
     remains intact, from a cyclical perspective, the year should see
     some consolidation in oil prices assuming a slowdown in world
     growth and a less dramatic decline in the dollar.

 9. Information technology, healthcare and energy outperform
     utilities, financials and consumer discretionary.
    In general, we prefer companies with good earnings predictability
     and with strong income statements and balance sheets. We also
     favor companies that derive a significant portion of their
     revenues from outside the U.S. The desire for higher
     predictability drives us toward the healthcare sectors and to
     some areas of technology, while looking for global exposure
     points to other areas of technology and to the energy sector. All
     three sectors also exhibit good earnings growth prospects and are
     reasonably valued. On the other side of the ledger, utility
     stocks have performed strongly for some time, and we believe they
     may be overvalued. The consumer discretionary and financials
     sectors appear likely to remain under pressure given credit-
     related and consumer spending issues.

10. Democrats capture the White House and increase their lead in the
     Senate, House and governors' mansions for the first time since
    By our analysis, most signs point to a Democratic sweep in this
     year's elections. A federal government led by Democrats would be
     more likely to push for increased marginal tax rates and possibly
     the reduction or elimination of the tax-advantaged treatment that
     capital gains and qualifying dividend income currently receive.
     At the same time, we would expect to see a rise in trade policies
     designed to "protect" jobs in a sluggish economy. In all, such
     moves would likely be a net negative for equities, but not to a
     dramatic degree.

   The Scorecard for 2007

   Doll also provided a recap of his "10 Predictions" for 2007, along
with a "score" for each prediction and an assessment of the actual

   "2007 began much like 2006 ended, with some slowing in U.S.
economic growth, a Federal Reserve that remained on hold, and a
generally positive investment environment. In the first half of 2007,
solid earnings growth and continued high levels of
merger-and-acquisition activity allowed equities to move almost
inexorably upward.

   "But what a difference six months made. The benign fundamentals
that dominated from 2003 to 2006 - namely, strong global growth,
rising profitability levels, and falling risk premiums - were replaced
by credit stress, pressures on the capital position of the financial
system, question marks about the sustainability of the business cycle,
and rising food and energy prices. Reflecting these woes, government
bond yields plummeted, the dollar's decline intensified, equities
became volatile and trendless, and the Fed's focus shifted from
inflation fighting to providing liquidity and lowering rates," Doll

   "While there certainly were unexpected developments along the way,
the main themes for 2007 that we expected to occur did come to pass,
making it a good overall year for our predictions," he said.

 1. The U.S. economy slows to between 2% and 2.5% growth as non-U.S.
     growth remains relatively robust.
    Score = Correct
    The slowing U.S. economy was one of the headline stories of 2007,
     as the plummeting housing market sparked fears of a potential
     recession. While the final numbers are not yet in, preliminary
     indications point to overall U.S. gross domestic product (GDP)
     growth of somewhere between 2% and 2.5% for the year. Outside the
     U.S., most other developed markets experienced at least some sort
     of slowdown, but, on balance, growth levels remained quite
     robust, especially in emerging markets.

 2. Earnings growth in the United States is below trend for the first
     time since 2001.
    Score = Correct
    The long-term trend for corporate earnings growth is around 7%.
     Earnings growth was higher than that during the first half of the
     year, but as credit concerns intensified, earnings levels for
     many companies (especially for financials and consumer-related
     companies) suffered. Earnings growth levels for the third quarter
     were actually in negative territory. With continued weakness
     expected in the fourth quarter, it appears that overall 2007
     earnings growth levels will be below 7%.

 3. The U.S. yield curve turns modestly positive as short rates fall
     and long rates rise.
    Score = Half Correct
    Bond yields did not behave exactly as we expected them to at the
     beginning of the year. Short-term rates certainly fell, but long-
     term rates followed suit, as yields declined across the entire
     curve for all of 2007. However, the core prediction did come to
     pass, as short rates fell more than long rates, which resulted in
     an overall yield curve steepening.

 4. Equities experience another good year as P/E ratios expand for the
     first time in six years.
    Score = Correct
    At the beginning of the year, we used the phrase "reasonably
     constructive" to describe our outlook for equities, with
     "constructive" meaning an up year for stocks and "reasonably"
     meaning not as much as in 2006 and with more volatility along the
     way. Because stock prices advanced more than earnings, P/E ratios
     did expand during 2007, particularly in non-U.S. markets.

 5. The average stock underperforms the broad market averages as
     large-cap and high-quality stocks outperform small-cap and low-
     quality stocks.
    Score = Correct
    This trend began developing around mid-year, and accelerated as
     the year progressed, with both large-cap and higher-quality
     stocks showing noticeable outperformance. As a result, the
     average U.S. stock did underperform the broad market averages.

 6. The energy, healthcare and information technology sectors
     outperform the utilities, telecommunications and consumer staples
    Score = Correct
    Energy stocks outperformed sharply in 2007 (no surprise given that
     oil prices approached $100 per barrel), and technology stocks
     also were strong performers. Among those sectors we pegged to
     underperform, the big surprise to us was the utilities sector,
     which experienced another good year in 2007. Taken as a whole,
     however, energy, healthcare and information technology
     outperformed utilities, telecommunications and consumer staples.

 7. The U.S. trade-weighted dollar moves to its lowest level in a
    Score = Correct
    The value of the dollar fell throughout the year, a trend that
     accelerated sharply as the U.S. economy slowed relative to the
     rest of the world and as the U.S. Federal Reserve cut interest
     rates more quickly than other central banks. By November, the
     dollar had reached a new record low against the euro and had
     posted multi-year lows against many other currencies.

 8. Japan is the only major country to experience increased nominal
     growth, leading to equity market outperformance.
    Score = Incorrect
    This appears to be our only prediction that was just plain wrong.
     Consumption trends remained very weak in Japan, which detracted
     from overall economic growth in 2007, and Japanese stocks were
     among the worst performers for the year.

 9. Volatility and return spreads increase from historically low
    Score = Correct
    While we were expecting heightened volatility in 2007, we
     certainly did not expect it to increase as much as it did. Return
     spreads between sectors and individual companies also increased
     noticeably in 2007.

10.  Populist politics experiences a renaissance in the United States.
    Score = Correct
    Discussions about issues such as trade policies and tax reform
     heated up in 2007, and we expect such issues to remain at the
     forefront of political discussions as the 2008 campaign season
     progresses. As we get closer to this year's elections, we
     anticipate that headline risks also will intensify.

   What's An Investor to Do?

   In addition to his oft-repeated advice to investors to continue
working closely with their financial professional to ensure that their
investment portfolios are designed to best meet their long-term goals,
Doll offered the following general investment guidelines for 2008:

   --  Retain overweight positions in equities: Particularly if our
        call is correct and the economy avoids a recession, we believe
        equities are attractively valued when compared to other asset
        classes (particularly bonds) and that investors should
        consider overweighting stocks in their portfolios, where

   --  Buy into weakness (and strength): 2008 looks to be another
        year dominated by market volatility, but that does not mean
        that investors should avoid the markets. Employing dollar-cost
        averaging strategies* can be a good bet during turbulent times
        and can help keep your investment plan on track.

   --  Think about U.S. equity styles and sectors: In an environment
        of slowing economic growth, we recommend a focus on mutual
        funds or other investment vehicles that invest in large-cap
        and/or growth stocks. Additionally, we believe investments in
        the technology, energy and healthcare sectors represent
        attractive opportunities in 2008.

   --  Scan the globe: Not only does international investing offer
        diversification benefits, but some non-U.S. markets
        (particularly emerging markets) look especially attractive. In
        addition, investors can focus on large, multinational
        companies based in the U.S., which tend to have a higher
        degree of earnings predictability and are attractively valued.

   --  Consider commodities as a long-term investment: While we
        believe we may be due for some sort of cyclical downturn in
        oil and other hard commodities, the fundamental long-term
        secular case for commodities remains sound.

   About BlackRock

   BlackRock is one of the world's largest publicly traded investment
management firms with USD 1.3 trillion in assets under management as
of September 30, 2007. The firm manages assets on behalf of
institutions and individuals worldwide through a variety of equity,
fixed income, cash management and alternative investment products. In
addition, a growing number of institutional investors use BlackRock
Solutions(R) investment system, risk management and financial advisory
services. Headquartered in New York City, the firm has approximately
5,100 employees in 19 countries and a major presence in key global
markets, including the U.S., Europe, Asia, Australia and the Middle
East. For additional information, please visit the company's website
at www.blackrock.com.

   *No investment is risk free, and a systematic investment plan does
not ensure profits or protect against losses in declining markets.
Because dollar cost averaging involves continuous investment in
securities regardless of fluctuating price levels, you should
carefully consider your ability to continue to purchase during periods
of price declines.

   This material is not intended to be relied upon as a forecast,
research or investment advice, and is not a recommendation, offer or
solicitation to buy or sell any securities or to adopt any investment
strategy. The opinions expressed are as of January 8, 2008, and may
change as subsequent conditions vary. The information and opinions
contained in this material are derived from proprietary and
nonproprietary sources deemed by BlackRock to be reliable, are not
necessarily all inclusive and are not guaranteed as to accuracy. Past
performance does not guarantee future results. There is no guarantee
that any forecasts made will come to pass. Reliance upon information
in this material is at the sole discretion of the reader. Investment
involves risks. International investing involves additional risks,
including risks related to foreign currency, limited liquidity, less
government regulation and the possibility of substantial volatility
due to adverse political, economic or other developments. The two main
risks related to fixed income investing are interest rate risk and
credit risk. Typically, when interest rates rise, there is a
corresponding decline in the market value of bonds. Credit risk refers
to the possibility that the issuer of the bond will not be able to
make principal and interest payments. Index performance is shown for
illustrative purposes only. You cannot invest directly in an index.

   (C)2008 BlackRock, Inc. All Rights Reserved.

BlackRock, Inc.
Brian Beades, 212-810-5596
Bobbie Collins, 212-810-8155
Tiller, LLC
Jim Marren, 212-358-8515

Copyright Business Wire 2008
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