Jeffrey Saut, the chief investment strategist at Raymond James, believes the S&P 500 index could double within the next nine years. That’s right, he told Barron’s in a recent interview that the S&P could reach 4,300 by the year 2024.
Does Saut accurately see the future, or is he nuts?
There are several ways to evaluate his claim, and ultimately whether or not it matters to you, the individual investor.
Basically, Saut says that stocks will return 11% annually, well above their long-term average of about 7%. His thesis is that the recovery cycle out of the financial crisis is much more extended that we normally would see in a regular recession. Thus, a secular bull market that might be in its late stages at this point is only mid-cycle.
There is some merit to this idea. The recovery has been slow and grinding. It also assumes that this recovery will be like any other. Some observers believe that the recovery has been lousy because of the perceived anti-business position of the current administration. If the recovery picks up, then Saut may have a point.
Another way to view things is how the market’s current valuation stacks up to history. One way to look at things is the current price-earnings ratio of the S&P 500 versus its historical mean. Right now, we’re looking at a P/E ratio of 20.47 versus a mean of 15.54 and median of 14.58. That suggests a lot of danger, and that the market is overvalued at the moment – possibly by a lot.
Another measure is to take the famous Shiller P/E ratio, named after Robert Shiller, the Nobel Prize-winning economist. Shiller’s cyclically adjusted P/E ratio uses the 10-year average of real, inflation-adjusted earnings. That smooths out spikes in the P/E ratio caused by things like the dot-com bubble and financial crisis.
Using this ratio, we are in even worse shape, with a P/E of 26.9 versus a mean regression of closer to 18.
On a strictly anecdotal basis, when I look over all the articles I’ve written here and elsewhere over the past two years, I see a pattern of seriously expensive stocks. This seems true across every sector and asset class. Finding value is really difficult.
Weighing against Saut is a mutual fund manager I really respect named Robert Rodriguez, who runs FPA Funds.
“Profit margins have only improved slightly while top line revenue growth for the S&P 500 has averaged between 2.5% and 3%,” Rodriguez stated in an October 2014 speech to the CFA Society of Nevada. “In contrast, earnings per share growth, benefiting from aggressive corporate share buybacks, has been above 5%.”
There’s been a lot of financial engineering going on with some blue chip names that have goosed their EPS. So the “earnings” denominator in any calculation is being messed with to make it larger than it is organically.
Rodriguez thinks that the Federal Reserve’s quantitative easing policies also inflated asset prices along the way, and that’s what contributed to the market’s rise – not earnings.
He noted in the same October 2014 presentation: “I anticipate that prospective stock market returns should average less than 5% and more likely closer to 3% for the foreseeable future. Again, the penalties for holding liquidity are not that substantial when compared to the risk and likelihood of principal loss.”
The bottom line is that you can listen to everyone or no one. My advice is always the same: maintain a highly diversified, long-term portfolio. Over a period of 20 or 30 years, how the market does is not going to be all that important.
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