(MoneyWatch) The market may have just logged five straight days of losses, but that doesn't mean investors should abandon stocks just yet, says Bob Doll, chief equity strategist at BlackRock (BLK).
Continued market gains are still likely in the year ahead, although they will be harder to come by, the strategist says in a new report to clients. After all, stocks just enjoyed their best first quarter since 1998, leaving them more than set to take a breather.
"Stocks have advanced very far, very quickly and we would not be surprised to see some sort of consolidation or setback," Doll writes in a new report to clients. "The pace of gains has slowed in recent weeks, so we very well may be at the forefront of such a period."
That said, Doll doesn't believe we've seen the market highs for this year yet. That behooves investors to stick to their investing plans and maintain allocation to stocks.
Here's what BlackRock says you should do with your money now:
Stick With Stocks. The table appears to be set for continued outperformance by equities. Decent economic growth, solid corporate earnings, reasonable valuations and low interest rates indicate to us that stocks should outperform cash and Treasuries over the coming months and years.
Focus on Free Cash Flow and Dividend Growth. BlackRock's core investment theme for 2012 remains unchanged: Focus on ample free cash flow that would allow companies to engage in shareholder-friendly practices. Dividend-paying companies have long been a focus for many investors. It is critical to remember, however, that it is not dividend payments themselves that are attractive, but the quality of those dividends and the ability to grow them.
Factor in Geographic Strengths. Among developed markets, BlackRock continues to favor a higher weighting to the U.S., since U.S. economic growth should be stronger and U.S. stocks should continue to outperform. This is not to say that international equities should be avoided, since they continue to represent a valuable diversification tool, but simply that we see greater opportunities in U.S. markets. At the same time, the long-term case for investments in emerging markets remains intact. We particularly advocate an emphasis on U.S. multinational companies, which can benefit from growth trends in emerging markets.
Expect Falling Correlations. As macroeconomic conditions appear to be improving and as investor sentiment is rising, we have been seeing less of a "risk-on/risk-off" trading pattern so far this year, and we believe that trend will continue. As such, correlations within and among different asset classes have been falling, suggesting that security selection is becoming increasingly important.
These core strategies should help investors make the most of what upside remains in the market going forward. "Although gains are likely to be uneven and realized at a slower pace than occurred in the first three months of 2012, we do believe prices will be higher at year-end than they are today," Doll says.