Inside Wall Street: One Pro's Argument for the Dow's Return to 14,000

After a rambunctious 50% run-up since March, could the Dow Jones Industrial Average still have the spark and energy keep such an ambitious advance going?

As investors try to peer ahead into 2010, one nagging question for the charging bulls is whether they'll ever see the Dow again at 14,164.53. That's the magic number representing its all-time high of Oct. 9, 2007 -- the days of what Alan Greenspan termed "irrational exuberance."%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% The Dow didn't stay there for very long, of course. And by Dec. 1, 2008, the 30-stock component index had plunged 679 points, to a closing low of 8,149.09, amid an unprecedented financial meltdown and the worst recession the nation has experienced in more than 30 years. But the market's rebound has been fast and furious: Since hitting that low, the Dow has bounced back with a vengeance, closing on Dec. 28, 2009 at 10,547.

Still, that's a long way -- about 35% -- below 14,000. But some folks think the Dow has a chance to retake that high ground -- and they're not just casual commentators or loony TV talking heads. Some preeminent investment industry pros are among their number.

Such as Robert Doll of BlackRock. "We will hit 14,000, perhaps not in a year, but probably in a couple of years," says Doll, vice chairman and global chief investment officer at BlackRock, one of the world's largest asset management companies, which shepherds $3.2 trillion in assets worldwide.

When Stocks Make Their Move

Of course, a lot has to happen before the market can reach new highs. However, if you know how the market works, perception is often more powerful than reality. That is, when the market perceives that an economic recovery is just graduating to that elusive growth stage, that's when stocks make their move. And when that growth reality sinks in, it's usually too late to catch the rampaging bull.

Doll turned implacably bullish in late August as investors were overcome with fear over the market's relentless downswing. And he isn't wasting any time preparing for the next big bull move even as he anticipates a possibly moderate market rally next year.

What Doll is confident about is that the economic recovery is well in place. He believes investors need to get a grip of their fears and invest more in equities.

"We want to invest in risky assets, and so we are overweight in equities in our portfolios and underweight in cash," says Doll. His view is that the macroeconomic picture indicates "growth will be above-trend, and will be better than many expect. We will see real yearly GDP growth of 3% to 5% next year."

The Threats to Strong Growth

The government's "record massive fiscal and monetary stimuli are likely to eventually turn the U.S. and global economies around before the deleveraging forces promoting deflation overwhelms us," says Doll.

What could derail such growth, however, is the government's failure to pay more attention to liquidity and looser lending by the banks and credit institutions. He also cautions against excessive government deficit spending that could unnecessarily boost interest rates. High joblessness could also undermine the recovery. But Doll expects that the unemployment rate will start falling back as companies begin their own recovery phase.

In fact, Doll is most encouraged about how "lean and mean" U.S. companies have become. This gives him confidence that they'll deliver earnings and results that will exceed analysts' estimates. And to keep growing, businesses will have to start hiring again.

Where the Opportunities Could Be

Getting down to specifics, two sectors that Doll believes show promise and opportunity are health care and technology.

He says even as controversial as health care reform has been, the new legislation, if approved, would be a boon to health care providers because more people will have health insurance coverage that would enable them to seek more treatment and create more demand for care.

Technology, Doll believes, will continue to power innovation and produce new products that will lead Corporate America and the economy to greater heights.

His top choice in health care is United Healthcare (UNH), a diversified provider of health care services, currently trading at $32 a share. It's one of the best bets for long-term growth in the industry, says Doll. The stock is cheap at 10 times his estimated 2009 earnings of $3.10 a share, he figures. It deserves to trade at a price-earnings ratio of 13, which implies a price of $40 a share, he says. United Healthcare earned $2.95 in 2008.

In the tech sector. Doll's top pick is giant Microsoft (MSFT), which has retained its dominance in the software world. Its products, he says, will gain significantly from the next computer updating and refreshing cycle, and the consequent migration to the Windows 7 operating platform. Now trading at $29 a share, Doll figures Microsoft will hit the upper $30s in a year based on his estimated earnings of $1.80 to $1.85 in fiscal 2010 ending June 30, vs. $1.70 in fiscal 2009.

"The U.S. Will Outperform Europe"

Looking at how much has transpired in the stock market, Doll notes that the bottoming process started in October 2008. He is convinced the U.S. is the first place where investors should look for opportunities, followed by the emerging countries. "The U.S. [markets] will outperform Europe, and the emerging markets will outperform those in the developed nations," observes Doll.

If Doll is right and if the Dow is indeed headed back toward 14,000 again, this might be just the time for investors to look forward and put their money back to work.
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