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S&P 500 4,300 by 2025? Raymond James’ veteran chief investment strategist, Jeffrey Saut, expects a secular bull market (股市)

by super(学霸) ⌂, 2015-06-01 15:22 @ 学霸

published on wuwei.ca at 2015-06-01 15:22, topic link: http://wuwei.ca/index.php?id=26345

By Lawrence C. Strauss
May 30, 2015

The career of Jeffrey Saut, chief investment strategist at Raymond James, spans several eras—including the recession of the mid-1970s, the bull markets of the 1980s and 1990s, and the Great Recession earlier this century. Although economic data help form his views, Saut, 66, also relies on a network of contacts developed over more than 40 years for tips and insights. Saut, who is based in the big retail brokerage’s St. Petersburg, Fla., office, supplied strong opinions and perspective—as well as owning up to a few bad calls—in a recent phone conversation with Barron’s. Two good reasons to speak with Saut: He’s correctly recommended stocks since the U.S. started to come out of the financial crisis in 2009, and he accurately called the recent bottom in energy prices. He sees no reason to change course on stocks and thinks the Standard & Poor’s 500 could double to 4,300 within nine years.

“We are in a secular bull market…I have seen this play before, and secular bull markets tend to last somewhere around 14 or 15 years.” —Jeffrey Saut Photograph: Riku for Barron’s

Barron’s: Take us back to the early days of your career.

Saut: I got into this business in 1971. The market opened at 10 o’clock and closed at 3:30, and May Day, when commissions were deregulated, did not happen until a few years later, in 1975. Before that, if you paid $45 in commission for 100 shares, you paid $450 for 1,000 shares. The business has changed dramatically. Most investors had to go through their broker to get information, which was not ubiquitous like it is today over the Internet. People would actually come into brokerage firms to watch the ticker tape.

How has the job of an investment strategist changed?

Computers have certainly helped slice and dice the information. Back in the old days you would take your stock guide and go through individual stocks, trying to find companies that were trading below their net-net working capital—a term coined by Benjamin Graham and which analyzes a company based on its current assets minus its current liabilities and debt. Now you can set up a computer program and do those calculations instantly. So it’s a lot easier.

And probably harder, too?

It is harder in some ways, yes. Human nature hasn’t really changed. In the short run, the stock market is about fear, hope, and greed, only loosely connected to the business cycle, and people tend not to manage risk when they should.

What’s your outlook for stocks?

We are in a secular bull market—secular meaning multiyear, if not multidecade. There aren’t that many of us left that actually experienced the overall 1982-to-2000 secular bull market. So I have seen this play before, and secular bull markets tend to last somewhere around 14 or 15 years. And they tend to compound at a double-digit rate. So, if we are six years into this bull market, it figures there is probably another eight or nine years left. If you compound forward at double digits, you come up with 4300 for a price objective on the S&P 500 some time in 2023 or 2024. I have remained bullish since early March of 2009, when I went on TV and said the bottoming that started the previous October was complete and that we were all-in for stocks, and we have been pretty bullish ever since. There are corrections along the way, and I have told people on occasion to raise cash.

When was the last time you told investors to raise cash?

At the end of last year, I thought that if you had stocks in your portfolio that had not rallied in this straight-up market since June of 2012, then there was probably something wrong with those companies and you probably should sell them and raise some cash. That’s because my models and indicators going into 2015 suggested that the first few months of the new year were going to be more volatile.

What are your expectations for this year and into 2016?

The second quarter, from an economic standpoint, is still going to be a little squishy. But the underlying economy is actually stronger than the surface figures suggest. I expect to see stronger economic numbers coming out in the third and fourth quarters. For the end of this year, I am targeting 2,250 on the S&P, a 6% increase from current levels, and I expect the 10-year Treasury bond to be yielding about 2.5% by then, compared with 2.14% recently.

What else supports your bullish view?

The financial fiasco in 2008-09 was so severe that it is extending the midcycle recovery. Normally, in your father’s typical business cycle, you would be at the end of the midcycle recovery by now and moving into the late stages. But because ’08 and ’09 were so ferocious, and we’ve had a muted recovery so far, the midcycle recovery has been extended, and that is one of the reasons that GDP [gross domestic product] is going to strengthen in the third and fourth quarters of this year, with a concurrent restrengthening of the earnings outlook.

What do you say to those who think you’re too bullish?

I’ve been in the business for 44 years, and I’ve seen this play before. We’re in the midcycle of a secular bull market.

What in particular is flawed with the bearish case about the markets and the economy?

For one thing, they hold up the cyclically adjusted price-earnings ratio of the market [a measure of value] as being high, which it is historically. But I don’t have a lot of use for an indicator that would have kept you out of stocks for the past six years. If you use normal valuation metrics, stocks aren’t as cheap as they were back in ’09, but they aren’t all that expensive either, compared with interest rates. I can make the case that the P/E ratio for the S&P 500 should be between 18 and 20.5. That’s based on the Rule of 20, which says the P/E ratio, plus the inflation rate, should equal 20. So if your inflation rate is 2%, it suggests a P/E ratio of 18. That’s around where it is now on a trailing basis.

What could derail your bullish thesis?

Well, I lived in the D.C. Beltway for a good while, and I have a pretty good network there. You could have a policy mistake, although I am seeing more cooperation than I have seen in the previous six years. There was cooperation recently on the $1 trillion federal budget deal. Neither side wanted that deal, but it got done. And you saw cooperation when President Obama decided to let Congress play a role in the Iranian nuclear deal. So I don’t think a policy mistake is likely. True, you could have a Black Swan event, possibly a nuclear incident in Iran or North Korea or, God forbid, another 9/11, but I don’t know how you invest for that.

What about the argument that corporate profit margins are unsustainable?

I’ve been hearing that for five years. And I keep saying I’m not sure they’re going to expand, but I’m also not so sure they are going to contract all that much. We are not getting much push on the labor-cost side, although I have seen wages start to pick up recently. You’re also seeing companies saving on IT costs, partly by the more frequent use of cloud computing. Raw commodities aren’t pushing costs up either. While I don’t expect margins to expand, I don’t see them regressing to the mean like a lot of these people have been telling us for the past five years. They’ve been dead wrong.

Will the U.S. economy be able to handle a rate increase, whenever the Federal Reserve decides to do that?

Yes, it will. [Federal Reserve Chair] Janet Yellen is a gradualist. I don’t expect you are going to get what the Fed did between 2004 and 2007, when it regularly increased rates from roughly 1% to around 5.25% in stair steps. Our model says that she is going to raise the fed-funds rate starting in November, even though there is not a Federal Open Market Committee meeting that month, and that she is going to raise it by 25 basis points, or 0.25%. Then we expect her to step back for two, three or four months and see how it impacts financial markets, as well as the economy.

You know a lot of people, and you look at plenty of data. How do you formulate your views?

I was a trader on a trading desk when I came into the business in the early 1970s. Since then, besides being a strategist, I have been a stockbroker, analyst, portfolio manager, director of research, and head of capital markets. My rule is to talk to very smart people who have to put money to work. If a money manager I respect tells me I need to own a stock, I can use that as a great starting point for analysis because I assume he or she has done a lot of work on it already.

What lessons have you learned during all of your years as a strategist?

I was taught to take a stand. My dad also taught me that if you are going to be wrong, be wrong quickly for a de minimus loss of capital. So I’m not afraid to say, “Whoops, that was a mistake,” and sell the stock. And I do take stands, unlike a lot of people in this business. A lot of people write so that no matter what the markets do, they can point to something and say, “Look, I was right.”

Speaking of being right, you did make a bold call on energy earlier in the year, didn’t you?

That’s correct. I first said during a TV appearance in January that I thought crude oil was beginning to bottom. It had come down and was trading around $44 a barrel. Then, after a feeble rally, it went down again in March and traded down to just a little north of $42 a barrel. That’s when I said crude oil had bottomed.

What calls did you get wrong in recent years?

Last year I told people I didn’t want to be in fixed income. It was a terrible call, considering that yields fell during the year. Also, I told people I didn’t want to be in utilities, which turned out to be the best-performing macro sector in 2014. Both of those were terrible calls, and I said so in print. I’m not afraid, at 66 years of age, to say I’m wrong. Markets can do anything. In the first part of this century, they told us that stocks can’t go down three years in a row. Well, stocks went down for three years in a row, from 2000 to 2002. In 1974, you could buy companies that were trading not only below net-net working capital, but below cash per share. Markets, especially at inflection points, are not rational. In business school they try to teach you that markets are rational. But they are not rational when they are at inflection points, both on the downside and the upside.

Are stocks the best value out there?

After the recent art auctions, it looks like some of those premier art pieces have been a pretty good place to be. But, yes, stocks are the best place to be, especially dividend-paying stocks. Those companies, especially the ones that have increased their dividend by 10% or more forever, make a lot of sense in this climate.

Your firm works for a lot of individual investors. What’s on their minds?

The individual investor, for the most part, thinks the only reason stocks are up is because of the liquidity the Federal Reserve has injected into the system. There is no doubt that has helped. But earnings have done pretty well since the financial crisis. Individual investors also worry about the political dysfunction inside the Beltway, ISIS, and a lack of GDP growth. What you have to remind them, however, is that the equity markets don’t care about the absolutes of good or bad. All the equity markets care about is whether things are getting better or worse. In my view, they are getting better.

What are a few areas where you see value in stocks?

One is banks. I expect that eventually, one of the big U.S. banks is going to spin out one of its divisions, possibly asset management. These banks have been regulated out of a lot of their profitable businesses. And if they are going to realize the full value of their different divisions, they will have to do that. If it is successful, you will see a domino effect of mega-banks doing the same thing. We also expect a big consolidation from roughly 7,000 banks currently to about 4,000 banks over the next seven or eight years. Regional banks are going to buy those smaller banks. And if that’s the case, you should consider a pair trade in which you are long the community banks and short the regional banks, because I expect the regionals are probably going to overpay.

One other theme is that we own about all of the drugstore stocks, because we figured out when Obamacare was put into place that the big beneficiary was going to be drugstores. Our holdings include Rite Aid [ticker: RAD], CVS Health [CVS], and Walgreens Boots Alliance [WBA].

Thanks, Jeffrey.

E-mail: editors@barrons.com
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