Jeff Saut has played the downturn and the upturn about as well as anyone. The Chief Strategist at Raymond James has been bullish since April and is unwavering in his bullishness despite the huge move in stocks. He sees the continued skepticism in the market has a primary driver of equity prices:
the negative nabobs continue to call this a bear market “sucker’s rally!” While it’s true that markets can do anything, the real “suckers” have been the bears who didn’t employ adaptive asset allocation and consequently have “sat” out the seven-month rally. Clearly, we disagree with the bears’ assessment, having maintained the view that this is a new bull market since April.
That doesn’t mean there won’t be corrections. But as he has said before, Saut believes money managers will be forced to buy the dips as they play catch up into year end:
“Occasional corrections?!”… well so far said corrections have been brief and shallow. We have often opined this is because many portfolio managers have too much cash and have therefore underplayed the “bull run.”
He thinks any substantial pullback will be contained within support levels at the 50DMA and the 200DMA:
Certainly, there will eventually be a healthy pullback, but our sense is it will be contained to somewhere between the 50-day moving average (DMA) and the 200-DMA. In the SPX’s case that currently targets the zone between 1038 (50-DMA) and 910 (200-DMA).
A primary reason for his bullishness into year-end is the strong seasonal strength of the fourth quarter:
As ISI’s Francois Trahan writes, “the fourth quarter is seasonally the strongest of the year with average gains of 3.5%, a full 100 bp higher than the second seasonally friendly period: Q1… Indeed, since 1960, Q4 has finished in the black nearly 75% of the time.”
Does Saut believe the recovery is sustainable? He certainly seems to have bought into the idea that this is in fact a new bull market:
As for the all the “doubters” we encountered last week, who keep pointing to the rising unemployment numbers, we reminded them that employment is at the back-end of the cycle. Nevertheless, their chant goes like this, “how can we have a durable economic recovery when consumers account for roughly 70% of the economy; and, unemployment continues to rise while consumers continue to leave their “billfolds on their hips?” Ladies and gentlemen, the typical economic recovery is driven by corporate profits, not consumption! Those profits turn into the “investments” that foster a capital expenditure cycle, which eventually spurs corporate hiring. That’s the typical sequence and we think it plays that way this time. Verily, corporate profits are surging, which should stimulate more than just the “inventory rebuild” the naysayers suggest will quickly peter out. Accordingly, we think there will be a more durable capex cycle followed by the envisioned improvement in employment, which will indeed drive consumption.
His favorite way to play the continued rally? The leaders will continue to lead. In other words, the reflation trade and the high beta trade are still fully intact:
Should the various markets continue to trade higher in the months ahead, our sense is the sectors/stocks that have been the best performers off the lows will continue to be the best performers into year-end. Therefore, we would avoid playing the “laggards” in favor of the “leaders,” believing they will continue to “lead” if the equity markets trade higher. In addition to the aforementioned sectors, we would re-emphasize technology.
How high can the markets go? Saut thinks the markets could rally as high as S&P 1300:
The call for this week: Since the March “lows” we have repeatedly argued that the equity markets were three to four standard deviations below “normalized” valuation levels. Since then, they have merely rallied back to “normalized valuations.” Indeed, the DJIA only trades at a P/E ratio of 16 times earnings (according to Barron’s) and the gap between companies’ free cash flow yields and bond yields is at the widest since the early 1990s. As the prescient QB Asset Management folks write, “As the Fed and other central banks have been inflating their respective monetary bases dramatically over the last year, it is logical that gold has appreciated in dollar terms. It is also logical that stock markets have risen. In monetary base terms, the S&P 500 would have to rise to 1300 just to match the real/March ’08 lows.”
You can find the entire commentary here.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.