A BlackRock Chief Equity Strategist on Where to Invest Now

It was a rough spring, with volatility throwing investors for a loop. So does the roller-coaster ride continue, and what should investors do now?

Bob Doll, chief equity strategist and head of the US Large Cap Series equity team at the world's largest asset management firm, BlackRock (NYSE: BLK  ) , said in an interview   that we've probably seen the lows for the correction as far as price is concerned, but not duration. Doll, who managed $353 billion in active equities as of March 31, says he thinks the market is going to be stuck in a trading range while it muddles through the European debt situation, and as we try to gain clarity on the fundamentals and the durability of the economic recovery.

So what should you do now? Is it safe for investors to commit new money to this market? In this second part of the interview, Doll offers his advice for how investors should approach this market and where to invest now.

Here is an edited transcript of our conversation.

Jennifer Schonberger: What should investors do now? Is it safe for individual investors to dip a toe back into stocks after this roller-coaster spring we've had?

Bob Doll: I think we're in an environment where we're not going to get a runaway market in either direction. We're going to continue to have some volatility. I think if you have money on the sidelines earmarked for the stock market, into the weakness that we've had it is not a bad opportunity to do some dollar-cost averaging. I wouldn't try to be a hero and pick a day and say, "I'm putting it all in that particular day." I'd rather say -- I'll pick a number -- I've got $1,200. It's sitting cash, and it belongs in the stock market. I'd take $100 today, $100 a month from now, and dollar-cost average in.

Schonberger: Given the correlation between asset classes (commodities and stocks) and equities globally, how much does diversification help investors these days?

Doll: Less than it used to. It falls cyclically and secularly. What I mean by that is particularly when volatility goes up and markets go down, correlations always go up. We've seen that happen [with] the secular story ... Let's just take between geographies, forget asset classes for the moment. If Country A is doing OK and Country B isn't, there's a perfect diversifier for you. But on the other hand, if Country A and B are now trading with each other, and trading more and more with each other as a percentage of the economy -- which is true all around the world -- the independence factor goes down significantly. So the fact that correlations have moved up slowly but surely is no surprise. So, you get some benefit, but not the benefit you used to from diversification.

Schonberger: I guess that would call for a more agile investor.

Doll: Yeah, I think it does. As an equity guy, so often we talk about the company's headquarters. We look at a portfolio and say you've got this much in the U.S., and that much in Japan. Well, do you really? What's more important than where the company is headquartered is where they do their business.

Schonberger: Yeah, where are their earnings coming from?

Doll: Exactly. And that's a much harder thing to come up with because you've got to estimate some of those things. I think that's the real question about diversification: Where is the business being done? Not where is the company headquartered, and therefore gets rolled up into your geographic mix.

Schonberger: That's a great point. What are your favorite sectors and companies right now?

Doll: We still like some of the global cyclicals. They come in a variety of forms like the industrial space Parker Hannifin [NSE: PH] and the material space like Freeport-McMoRan [NYSE: FCX]. You can get energy stocks that fit the global cyclicals. I'll serve up Chevron [NYSE: CVX] as an example there. But on the other hand, I think investors should also still have some economic independence and more defensive names in the portfolio -- so for instance, in technology, Microsoft [Nasdaq: MSFT]; in health care, UnitedHealth [NYSE: UNH]. I think you need some from column A and some from column B, if you will.

Schonberger: I understand that BlackRock owns shares of BP [NYSE: BP]. But if I were an individual investor and I didn't own shares of BP, should I be buying at these levels, or is it catching a falling knife, given the uncertainty?

Doll: ... My view is that BP is a special situation that will be influenced by politics. I've learned over time that trying to figure out what politicians are going to do is a really tough exercise, and therefore I usually put those kinds of stocks in the "no opinion" category.

Schonberger: Given this spill, what are the implications for oil drillers? In general, would you buy oil drillers here, given that some of them have sold off on the headline risk?

Doll: Yeah. I think that if you're constructive on global growth, and therefore into this weakness, energy stocks in particular are interesting ... I don't think you have to buy the names that are associated with the Gulf of Mexico. You can buy some land drillers that have gotten hit, as well.

Schonberger: Does gold look frothy to you at all these levels?

Doll: I think that because gold is a commodity and it's up a lot, it could correct at any point in time. Commodities can go up or down 20% or 30% without a cause. So with that caveat, my view is over time, gold is still going to work its way higher.

I think gold has done well because it's viewed as a substitute for the three main currencies of the world -- the dollar, the euro, and the yen -- all of which have some problems. So, I think global investors are saying, "I don't like those three currencies. I'm going to buy some gold instead." So, if you view gold as a type of currency substitute, I think there are reasons to believe gold's not seen its high yet.

Schonberger: Where do you see the S&P ending the year?

Doll: In the interest of full disclosure, at the beginning of the year we put out a target of 1250 for the S&P ... and I'm going to stick with it.

For more insight from Bob Doll:

Fool contributor Jennifer Schonberger owns shares of Microsoft, but does not own shares of any of the other companies mentioned in this article. You can follow her on Twitter. Microsoft and UnitedHealth Group are Motley Fool Inside Value choices. UnitedHealth Group is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of UnitedHealth Group and has a disclosure policy.


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