Bad News Already Baked in the Cake

This just in from Bob Doll at BlackRock:

In our view, the good news is that it seems most of the bad news is already known, and the stock market, at least, has already priced in the likelihood of at least a mild recession. Additionally, we have seen massive monetary and fiscal policy responses and also are seeing some mortgage refinancing activity as a result of lower bond yields. The bad news is that the Fed still has some catching up to do, and the European Central Bank appears unwilling to lower interest rates at present, despite dovish statements. We also continue to see a great deal of turmoil in credit markets, which has been putting enormous amounts of pressure on financial institutions. All told, we believe the positive factors will keep the U.S. economy and nonfinancial corporate profits at least somewhat intact, but we recognize that the risks are clearly to the downside.

In our opinion, the overwhelming amount of negative sentiment in the markets suggests that (from a contrarian perspective) the preconditions for a market rally will eventually come together. The "positive surprise" that sparks such a rally could be how well the nonfinancial corporate sector holds up. We do not believe such a rally will happen, however, before stock prices complete a bottom-testing phase. It appears to us that equity markets are heading toward a secondary bottom (the first having occurred on January 22 before the Fed stepped in with its emergency rate cuts), which should be somewhere in the neighborhood of 1,270 for the S&P 500. Unless we experience a more severe economic downturn than expected, we believe such a level could be the low point for 2008 and could mark attractive buying opportunities.