First the good news: The S&P 500 should climb by about 19 percent or so from yesterday’s close, says mutual fund manager Steve Leuthold in his firm’s “Green Book” monthly research report, released this morning (subscription required). Now the bad news: “Then [it] will give up those gains in the second half of the year.” In short, the bull is getting old.
Nevertheless, the firm—managers of the Leuthold Core Investment fund (LCORX)—retains a 65 to 67 percent net exposure to equities, down slightly from 70 percent in mid-December. (Leuthold’s maximum exposure to equities is 70 percent.) Last year, the fund returned 26.93 in 2009, 273 basis points better than its category (large-blend, “moderate allocation” funds), according to Morningstar. Its three-year return was 3.97 percent, or 596 basis points ahead of its competition.
Leuthold, a noted contrarian with a heavy quantitative basis, said his firm reduced its exposure to high-yield bonds, saying the spread is now rated “neutral.” In a summary to the “Green Book” (formally called, “Perception for the Professional,” and published by Leuthold Weeden Institutional Research), Leuthold wrote, “Proceeds and additional cash used to create a new 9 percent ‘Better than Bonds’ allocation which was established by adding six high-yielding equities to the existing REIT holdings.”
Doug Ramsey, a senior research analyst, put himself out on the line, making a prediction for the coming decade. “Looking back, simple projections of regression to the mean for both earnings and p/e ratios at the end of 1999 would have produced an S&P 500 close within 1.4 percent of the actual close on 12/31/09, ten years later.” He concludes: “Similar analysis for the next decade predicts better performance than the past decade, but still below average.” Of course, as Steve Leuthold always says (am paraphrasing from memory), Predictions are show; portfolio changes are for dough.”
By the way, Leuthold wrote an article for this magazine in December 2003, calling the end of the bear market.
[Leuthold and his team use a five-year, “normalized” p/e multiple of the S&P 500 to determine value. “Earnings are very cyclical by nature; their ebbs and flows causing p/e ratios to move in erratic, less meaningful ways,” the company says. “Near the bottom of an economic contraction, with corporate earnings reduced dramatically, p/e ratios can look very high. However the best buying opportunities are often presented around cyclical economic nadirs. This is why it is important to use normalized earnings.”]