Jeff Saut: The Inventory Cycle Is Over, But Now Comes The Capex Boom That Will Lift Stocks And GDP

The knock on Q3 GDP was that it was too much based on inventory restocking, and that that was unsustainable.

Raymond James’ Jeff Saut is not concerned as the inventory rebuild will lead to a capex boom:

Well, today is session 58 in the September – November “buying stampede,” making this stampede the longest I have seen in more than 40 years of market observations. It is also Thanksgiving week and history shows the DJIA has ended this week higher in 38 of the past 59 years (or 64% of the time). Additionally, over the last eight years the Dow has gained in six of those years with its best performance (since 1950) coming in 2008 with a 9.73% weekly rally. Its worst week was in 1973 with a drop of 4.2%. Hence, I continue to cautiously favour the upside. Meanwhile, the “oil” that makes the “economic engine” run, namely the M2 money supply, has increased for the past six months (+6.2% annualized rate). Such increases only reinforce my recommendations on “stuff stocks” (preferably with yields).

As for my views that the waning inventory-rebuild cycle will give way to a capex cycle, recent CFO surveys show intentions to boost capital equipment expenditures (capex), and hiring, are increasing. Therefore, my longstanding strategy that a “profits boom” will give way to an inventory rebuild, and then a capital expenditure cycle followed by increased hiring, and then a pickup in consumption, remains “stirred,” but not shaken. As for the strongest sectors, they remain Energy, Basic Materials, and Information Technology, while the best performing market capitalisation class is the mid-caps. I think those areas are “buys” on any weakness and continue to think any near-term selling will be contained, leaving the major indices higher into year-end provided the 1130 – 1160 zone on the S&P 500 (SPX/1199.73) is not breached to the downside.

Meanwhile, Saut expects tomorrow to bring us a GDP revision from 2.0% to 2.7% vs. current consensus of 2.4%.

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