NEW YORK (Reuters) - Stocks have broken their downtrend and will trade in a narrow range for as long as four months, though financial shares will likely underperform for possibly years to come, Bob Doll, global chief investment officer for equities at BlackRock (BLK.N), said on Monday.
Doll told the Reuters Investment Outlook Summit in New York that while deflation, an environment of falling prices, is a big threat, the more likely scenario is a severe U.S. recession. Stocks are likely now in a bottoming process under that backdrop, he said.
“We are in the early stages of the nasty part of the recession, and so the economic news will be bad for months to come,” Doll said. “But markets bottom before economies do.”
There's "some chance" that markets hit their bottom on November 21 -- when the Standard & Poor's 500 index .SPX traded at its lowest point in 11 years, Doll said, adding, "I think we've broken the downtrend and gone sideways."
Doll said the “bottoming process” began on October 10, when the benchmark S&P 500 index hit 840 with “incredible volume, horrendous breadth, bad high ‘new lows’ list,” he said, “There were some signs of capitulation.”
The S&P on Monday gained 3.84 percent to close at 909.70 points, the first time since November 13 the benchmark index closed above 900.
Nevertheless, even with the S&P financial index .GSPF down 56 percent this year, Doll said BlackRock is avoiding the sector, as credit strains remain.
“We don’t know what the new models will look like for a lot of these industries within the financial sector,” Doll said. “We’ll have vicious rallies — no question about it, just like we did in tech and energy — but we are still in a period of underperformance over time.”
He said sectors he likes are energy, healthcare and technology. Doll said the recession had severely crimped oil exploration activity. “We’re not drilling enough holes in the ground to even replace what we’re using. People are sitting on their hands, projects are getting canceled,” Doll said.
“When we get economic recovery, we’re going to use more of the stuff again and we haven’t found enough of it. Therefore, the supply and demand imbalance is still a problem, which will again call for higher prices.”
Doll said the recession has cheapened stocks of well-diversified energy firms and cited names including Occidental Petroleum (OXY.N), ConocoPhillips (COP.N), Chevron (CVX.N) and Apache (APA.N) as ones that investors should consider buying into before the market’s recovery.
(For summit blog: summitnotebook.reuters.com/)
Additional reporting by and Herb Lash; Editing by Leslie Adler