Raymond James strategist Jeffrey Saut — a bull who has been on the correct side of the rally for the entire year — lays out some of his big themes for 2010, while also expressing serious concern about the stock market action of the last few weeks.
As for the other themes as we enter the new year, our sense is the U.S. will experience 3.5% GDP growth in the first half of the year and then slow to 2.5%. Consequently, global growth in 2010 should be uneven. Near term, advanced economies should experience a bounce in activity that will last into the first half of the year. Following that, monetary policies will vary. Emerging markets will
need to tighten much sooner than the G7. We do expect interest rate hikes from the ECB and the Bank of Japan in 2010. However, we also think participants are wrong in expecting interest rate hikes too early given the fragile economic environment. Further, in 2010 we think investors should be positioned for: Sovereign balance sheet risk (potential defaults: Venezuela, Ukraine, Argentina,
Pakistan, Latvia, etc.); increased geopolitical threats; Asian urbanization; a potential commercial real estate crisis; rising taxation/inflation/regulation; the emerging and frontier market consumer; rising global growth, free cash flow beneficiaries; energy and alternative energy; infrastructure plays (electricity, water, etc.); technology (read: volume monetizers); U.S. exports and business spending; dividends; and a return to active portfolio management. Indeed, stock selection, and active portfolio
management, are likely to be the key drivers of portfolio returns in the year ahead. As for style, while we always like special situations, from a macro perspective we favour quality growth, dividend yield, positive earnings revisions, and large capitalisation stocks.
As for last week’s stock market action, we were manifestly disappointed, having believed the SPX was poised to surmount its 50% retracement level at 1115 (measuring the decline from October 2007 to March 2009), triggering upside targets between 1160 and 1200. Alas, it was not meant to be as the index tried, and failed, for the fourth time to breach 1115, setting the stage for potentially a fifth downside test of the 1085 level. While we remain constructive, history shows that the fifth test of a support level typically doesn’t hold. Therefore, in Friday’s verbal strategy comments we concluded, “We think it’s pretty important that the equity markets build on this morning’s opening strength.” And while that didn’t happen, the markets did stabilise following the “Thursday Tumble” (-133 DJIA). Still, with market valuations below their 20-year mean valuation, surging earnings and low interest rates, we remain constructive.