The Rally Isn't Done for Good

Until today, we'd seen an impressive rally in the markets. Yet one long-time money manager sees the potential for another 15-20% in gains even from the recent highs of the rally.

At least that's the return Bob Doll -- the highly-regarded Chief Investment Officer of BlackRock (NYSE: BLK  ) -- has high bets on. At a recent CFA luncheon, Doll outlined his predictions on how he believes the market will close out the year:

 

Probability

Recovery Evident

2009 S&P 500 EPS

Y/E S&P 500 Level

Normal Recession

10%

Mid-Year 2009

$70 to $75

1150 to 1250

Nasty Recession

70%

Year End 2009

$50 to $55

1000 to 1050

Deflation/Depression

20%

2010 +

$35 to $45

500 to 700

By placing a 70% chance that by year end, the S&P 500 will reach levels well above its current value, Doll is pretty optimistic about a continuing near-term market recovery.

Why so confident?
According to Doll, several key factors are pointing towards a market bottom. As I've mentioned in the past, investors who wait for very specific and distinct signs of economic recovery before entering the market during a downturn are destined to get left in the dust.

But the general characteristics that Doll believes indicate that the low point for the market is near include the following, broken down into two categories. Fundamentally, Doll pointed to record levels of monetary and fiscal stimulus, as well as the massive impact of decline in oil prices from nearly $150 to $50 per barrel.

Moreover, from a valuation standpoint, stocks look attractive. Overall, the market's valuation fell to somewhere around 60% of GDP at the March lows. P/E ratios look extremely attractive, with many stocks carrying P/Es less than 10. Finally, dividend yields for the S&P 500 rose above Treasury yields for the first time in 50 years.

The key point Doll emphasized is that, overall, things are starting to appear "less bad." Historically, this is when the market begins to recover. When economic weakness beings to wane, investors become less risk averse and slowly add risky assets back into their portfolios.

Time to buy stocks
As the recovery enters its initial stages, investors seeking to recognize the profits Doll expects in 2009 need to be buying now. However, not all sectors will recover in tandem, so investors must carefully select where they choose to invest. Doll pointed out three industries he expects to carry the weight of the market's rally: energy, health care, and technology.

With oil prices having spiraled downward during the recession, a reversal could come quickly as supply and demand level out over the long term, particularly due to high demand levels in emerging markets. Energy companies like Exxon (NYSE: XOM  ) and Apache (NYSE: APA  ) have seen their shares take big hits, and now is a good time to capitalize on their attractive valuations.  

Health care companies have traditionally been viewed as defensive plays during downturns. And despite some concerns over the Obama administration's health care policies, I think the health care industry remains a safe haven for investors. Many drug companies are expecting positive bottom line growth during 2009. For example, GlaxoSmithKline (NYSE: GSK  ) and Abbott Laboratories (NYSE: ABT  ) are expected to report earnings growth of 6.4% and 10.5%, respectively.

Lastly, tech companies learned their lesson about bubbles back in the dot-com era, and thus many companies have remained conservative by sporting debt-free, cash-rich balance sheets. Google (Nasdaq: GOOG  ) , for example, has no long-term debt. Nearly one quarter of Apple's (Nasdaq: AAPL  ) share price is backed by cash.

Bottom line
Obviously, I can't say for certain whether the market has seen its lows. Volatility will stay with us for some time. However, there is growing evidence supporting the idea that the worst is behind us. And because of that, I agree with Doll that the market is positioned to continue rallying this year as confidence in our markets is regained. Investors who recognize this will likely be rewarded by year-end. Don't sell this rally.

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Fool Contributor Kristin Graham owns shares of Apple. The Fool has a disclosure policy.


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