On February 8 BlackRock Inc. (NYSE:BLK) chief Larry Fink talked on Bloomberg TV about why he was bullish on stocks. At the time the market was going through a huge rally as European fears drifted out of investor’s minds and US economic recovery looked like it was finally coming around.
We’re in a much different position now. Europe is back on the table again, recovery doesn’t seem to be as quick or as thorough as it was in the Spring. There’s huge problems in China and the BRIC block in general isn’t growing as well as everybody expected. We’ve been seeing a sharp drop in some stocks and general malaise on the market.
The Financial Times declared the “end of a six-decade passion for equities” in an article this morning. Are the nay-sayers right? Was Fink completely wrong in his assessment earlier in the year? I don’t thinks so.
The most important factor in the price of stocks will be economic recovery in the United States. The market is still far below the dizzying heights it reached in 2007 so there is room to grow. Many sectors will begin to explode with recovery as consumer spending begins to increase.
Tech companies that dominate the market will start selling more and more products as the upgrade cycles begin to contract. Larry Fink is looking at equity long. There is volatility now but it if the US economy recovers so will the prices of stocks. There are some downside risks.
The major downside risk is renewed economic crisis. The most likely cause of this would be a European climax or a really disordered Chines collapse. The worst possibility is both of these occurring at the same time.
In order for Europe to collapse it would have to be allowed to collapse. That is not in the interest of anybody with any decision making power. Europe’s crisis will reach a permanent solution. That is unlikely to come this year but it will come.
The fundamental relationship between recovery and a boom in equity is sound though there are a couple of problems that will make the rise more volatile. Web companies, which have become some of the most talked about and powerful on the market, are going through another stage ion their development. Firms in the Web 2.0 category have been impacted poorly by over high valuations and Facebook’s IPO which will hurt future tech IPOs for some time.
Bonds in the US are not giving enough return to attract investors. That will drive investors to equities. The economy is still undergoing a period of amazing technological innovation as new products come on line and new ways to earn revenue open up.
Equities are not dead. Larry Fink was right to support them. the market is going to be volatile this year. There are a lot of things going on that investors have no control over. That doesn’t mean there won’t be returns on stocks. It will be more difficult to pick the right ones. Equity is not dead.