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Merrill: Wall St. up in '02
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January 10, 2002: 1:51 p.m. ET
Chief investment officer Robert Doll predicts an end to recession and single-digit growth.
By Staff Writer Martine Costello
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NEW YORK (CNN/Money) - The U.S. recession will end and Wall Street will see "high single-digit" returns in 2002, according to an investment outlook released Thursday by a top Merrill Lynch executive.
Robert Doll, chief investment officer at Merrill Lynch Investment Managers, said the worst bear market in a generation ended ten days after the Sept. 11 terrorist attacks, and that the scenario will continue to improve for stocks this year.
Still, he said the five-year stretch through the end of 2002 will be the worst period for stocks in 25 years.
"I hope I'm wrong," Doll said. "But for the prediction to be wrong, stocks have to go up 18.5 percent in 2002."
Doll's forecast said that earnings estimates remain too high, and that they will disappoint Wall Street.
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Despite recent gains, the Nasdaq will fall short of the Dow in 2002, according to Doll. | |
Earnings problems will hit the tech sector particularly hard, so the Nasdaq composite index will lag the Dow Jones industrial average.
At the same time, stocks remain relatively pricey. The average price-earnings ratio for the S&P 500 is 19, while 25 percent of stocks in the index have a P/E of 52. "That's not typical of a bear market."
But small caps will outperform large caps, and growth will continue its strong performance in the fourth quarter and edge ahead of value this year, he said.
And he sees an "explosion" of merger and acquisition activity in sectors like technology.
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In fixed income, Doll thinks that high-yield bonds will perform well in 2002. In high yield, investors take on more risk in lower-quality bonds in order to (hopefully) reap higher returns.
While the Federal Reserve will start 2002 by making more rate cuts, he thinks the year will end with an increase. Short-term bonds will outperform long-term bonds.
Abroad, troubles with Japan's economy will result in the country's Nikkei crossing the Dow for the first time in history. The Nikkei will be declining and the Dow will be rising as they hit the same level a little above 10,000, according to the forecast. Merrill recently said it was cutting 1,200 jobs and closing 20 of 28 branches in Japan as a result of the country's financial woes.
The lesson: Diversify
Doll said he sees similarities between 1966 and 2000, both times when significant bull markets hit their peak. The period that followed 1966 was alternating bull and bear markets, which means investors should be prepared with a good asset allocation plan.
Investors will need both consumer cyclical stocks and industrial names at alternating times, as well as "defensive" issues in health care. 
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