This January marks the beginning of not just a new year, but a new decade. The U.S. economy has changed a great deal over the last 10 years -- and remarkably in the last year alone. Who would have thought General Motors would go bankrupt? Or that half of Wall Street's biggest brokerage houses, like Merrill Lynch (now owned by Bank of America (NYSE:BAC)), would cease to exist, leaving behind only Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS)? Who knew we'd be using Google (NASDAQ:GOOG) to find everything, or spending our days attached to a handheld computer Apple (NASDAQ:AAPL) calls an iPhone?
The last decade ended up being a lost one for stocks and jobs. Will the next 10 years be better than the last? What themes will dominate as our financial world continues to become progressively more integrated? Bob Doll, vice chairman and global CIO of equities at the world's largest asset management firm, BlackRock (NYSE:BLK), makes 10 predictions about the economy and the markets each January for the year ahead. Here are Doll's thoughts for this year:
- U.S. equities experience high-single-digit-percentage total returns, in the range of 6% to 8% annually, after the worst decade since the 1930s.
- Recessions occur more frequently during this decade, rather than only once a decade as occurred in the last 20 years.
- Health care, information technology, and energy alternatives are leading growth areas for the United States.
- The U.S. dollar continues to become less dominant as the decade progresses.
- Interest rates move irregularly higher in the developed world.
- National self-interest leads to more trade and political conflicts.
- An aging and declining population gives Europe some of Japan's problems.
- World growth is led by emerging-market consumers.
- Emerging markets' weighting in global indices rises by 10 percentage points.
- China's economic and political ascent continues.
No Japan scenario in the cards
Notice that Doll does not think the U.S. is in for a lost decade like that experienced by Japan. He says this is because the U.S. had a smaller asset bubble. During the peak, real home prices in the U.S. went up 65%, compared with 135% in Japan; peak valuations for the equity market were less rich, and Japan's monetary response was much slower than that of the U.S.
Potential growth also bodes more favorably for the U.S. now than it did for Japan at the time, Doll says. Japan at the beginning of its growth had flat population growth, which soon turned negative. "Productivity has struggled since 1980 in Japan," Doll says. "In the U.S., we still have modest population and workforce growth, partly due to immigration and, still, productivity gains."
What it all means
But what does all this mean for you as an investor? While 10 years is a long time to try to see into the future, Doll says the beginning of a new year is always a good time to reassess your portfolio, your asset allocation, and your goals. Doll recommends that investors focus on finding quality companies across small and large caps: "The economic backdrop remains uncertain, and a focus on companies with strong levels of free cash flow and solid earnings prospects makes sense to us."
For 2010 specifically, Doll is biased toward large-cap growth companies. He also encourages investors to think about geography. He favors the U.S. and emerging markets.
"Remember that gains will be harder to come by," Doll says. In many ways, the "easy money" in this bull market has already been made. "The year ahead will likely see ongoing volatility and heightened dispersion between the winners and the losers. In this sort of environment, selectivity will be critical."
What do you think the next decade will bring? Share your thoughts in the comments box below!
Check out Doll's predictions for 2010.
