By Michael Santoli
While it’s no longer young and carefree, the bull market entered 2013 with enough pep in its step for the major indexes to make a run at their all-time “twin peaks” reached in 2000 and again in 2007.
Doug Ramsey, chief investment officer at institutional-research firm The Leuthold Group, thinks the S&P 500 Index (GSPC) is likely to get to those highs in the first half of the year. Assuming it does, he figures it will be important to monitor the market’s health quite closely in what could prove to be a beguiling, drawn-out topping process.
“I’m just struck that we’re so close” to the old S&P 500 highs, he says in the attached video. “I mean, here we are 8% from that top-end number of 1565 made in October of ’07. Why not, we’re this close, might as well get there. This has been a very broad breakout, when you look at it in terms of sector leadership.”
Ramsey notes that the leadership of cyclical stocks and small-caps in the current rally look better than when the S&P was at similar levels in September.
Leuthold Group, founded more than 30 years ago by celebrated market handicapper Steve Leuthold, has a strong following among professional investors for its deep store of historical market analytics and careful sector-selection work.
At the moment, the firm’s models are favoring a “barbell approach” combining bets on the defensive, financially stable health care group and some more cyclical industrial and transportation plays. Health care is the firm's highest-rated sector, with a longstanding tilt toward drug stocks and hospital names.
On the more aggressive side, Ramsey notes that railroads and airlines look particularly attractive as the economy picks up. He favors these areas over, say, the toppy-looking consumer discretionary stocks.
Ramsey has been on alert for some months for signs that the bull market is running out of steam.
“That topping process can be highly variable and quite long,” he says. “Things tend to fall away one by one.” On a relative basis (compared with the broad indexes), the momentum in cyclical stocks and small-caps peaked almost two years ago.
Already-lofty corporate earnings levels remain an overhang on potential future equity returns.
“Our concern continues to be profits," Ramsey notes. "It’s not anything necessarily short-term bearish on the U.S. economy. It really has to do with what we call initial conditions.”
That is, profit margins across Corporate America have reached 10% -- well above their prior peak in 2007 - and thus can’t improve much if at all from here. Ramsey likes to say his “forecasts are for show, the weight of our disciplines are for dough.” But if the hurdle of current profit expectations prove too high, it could be that the market’s run to those old highs turn into a “triple peak.”
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