Commentary from Bob Doll, BlackRock's Vice Chairman and Chief Equity Strategist, For the Week of July 19

Stocks continued to rally in the early part of last week before embarking on a sharp sell-off that resulted in moderate losses. Overall, the Dow Jones Industrial Average lost 1.0% to close the week at 10,098, the S&P 500 Index fell 1.2% to 1,065 and the Nasdaq Composite declined 0.8% to 2,179.

The second-quarter earnings season has started and will help determine whether the economy remains on a recovery track. It is still early, but the preliminary numbers look good — 70% of companies that have reported have exceeded their revenue expectations and 80% have beat earnings expectations. The recent trend of weaker economic data does remain a source of concern, but we are hopeful that stronger corporate data will offset this weakness. We are seeing a “V-shaped” recovery in manufacturing, while the consumer sector is looking more like a “U shape.” The credit and housing markets, however, are still stuck in an “L shape.” Recent data suggests that second-quarter gross domestic product growth will come in at around the 2.5% mark, and we are expecting the second half of the year to remain choppy. Nevertheless, we believe income levels and consumption will continue to expand and we are still calling for an increase in private payrolls. Current trends support our belief that the recovery will proceed, albeit at a slow pace.

Stock prices have remained in a broad trading range for the past several weeks. Equity markets appear to be caught between a number of positive and negative forces. The list on the bullish side includes continued strong corporate earnings, reasonably cheap valuations, lower bond yields that have been helpful to both consumers and businesses, increasing share buybacks and dividend payments, and a still-accommodative Federal Reserve. On the negative side, stocks are being hurt by an environment of slowing (but still positive) economic and profits growth, weak money and credit growth, and ongoing uncertainty surrounding issues such as the sovereign debt crisis, the Gulf oil spill and the legislative agenda in Washington, DC. Over time, we expect the positive forces to win out and stocks to grind higher, but we would not be surprised to see equity markets remain in their current trading range until there is more clarity around the severity of the current slowdown.

A Whiter Shade of Pale - David Kelly, JPMorgan Funds

To paraphrase Procol Harum, for many observers, the economic recovery, which had looked a bit ghostly, just turned a whiter shade of pale.

 
Last week’s numbers on retail sales, while in line with expectations for June, contained downward revisions for April and May, suggesting that consumer spending may only have grown by 2% annualized in the second quarter.  In addition, a combination of lower-than-expected inventory accumulation and higher-than-expected imports in May will have further eroded estimates of second quarter GDP growth, which may now come in below 2% annualized in the numbers due out on July 30th.
 
Economic numbers this week will do little to restore color to the face of the recovery.  Housing Starts, due out on Tuesday and Existing Home Sales, due out on Thursday, likely both fell again in June in a continued hang-over from the expiration of the home-buyer tax credit.  Unemployment Claims may have ticked up in the latest week, although these numbers are still distorted by unusual seasonal patterns in automotive plant closings.  Meanwhile, the Index of Leading Economic Indicators, also due out on Thursday, should show a mild decline, as growth in the money supply and a steep yield curve only offset some of the weakness eminating from the housing and manufacturing sectors.
 
Ben Bernanke will testify on Wednesday and Thursday to Senate and House committees, as the Federal Reserve releases its mid-year Monetary Report to the Congress.  His comments, and the report, will likely reflect the Fed’s recent downgrade of its forecast for economic growth, while still stressing the likelihood of continued moderate expansion over the next few years.  While wanting to be realistic, the Fed will not want to further undermine already fragile confidence.
 
On a brighter note, according to Zacks Equity Research, 129 S&P500 firms are slated to report second quarter earnings.  The earnings season so far has been a positive one with 80% of firms beating analysts’ expectations.  This trend is likely to continue for the rest of this earnings season, and the current Federal Reserve forecast of roughly 3.25% growth in real GDP in 2010 and 3.85% in 2011, should be sufficient for a continued solid rebound in earnings, as well as an eventual increase in both long-term and short-term interest rates.
 
The investing public, which is continuing to pull money out of stock funds and reallocate to bonds, does not appear to be buying even the idea of continued recovery.  But with foreward P/E ratios and Treasury interest rates both at extraordinarily low levels, the odds still favor better returns to stocks than bonds in the years ahead.