Economic growth will slow a bit; earnings growth will moderate; large-cap will outperform small cap, non-U.S. equities will outperform U.S. equities for the fifth year in a row, and the stock market will have a correction and then resume the bull market.
These are some of the predictions for 2006 that Robert Doll, president and CIO of Merrill Lynch Investment Management, shared with journalists on January 10th at Merrill Lynch’s headquarters in downtown New York. Doll says he expects a double-digit stock market correction in 2006, “10% plus a bit, but not 20%,” to position the market for what he calls “the second half” of the bull market that started in October 2002. “Merrill Lynch is not bearish,” Doll emphasizes, but he says volatility is going to pick up, and a correction would be a normal event; “on average they happen every 18 months,” says Doll, and we haven’t had one since the bull market started, so we are overdue.
Doll expects that higher interest rates and oil prices will weaken consumer spending, though capital spending by corporations, thanks to lots of free cash flow, “remains relatively strong,” and will lead to a U.S. GDP of about 3% for 2006, slightly less than the 2005 GDP of about 3.5%, and the more robust 4.5% GDP in 2004. There is a long lag between the time short-term interest rates rise, and oil prices increase, and the time the consumer feels the pinch, he says, usually in the second year after such increases.