Courtesy of The Pragmatic Capitalist
Jeff Saut, Chief Investment Strategist at Raymond James, is unwavering in his year-end rally beliefs. Like JP Morgan, the prescient strategist believes investment managers will continue to play catch-up and will subsequently buy any dips and chase the upside. In his latest missive Saut says:
“we think the upside should continue to be driven by ‘game theory,’ which suggests that the under-invested institutional portfolio managers have to buy stocks into year-end driven by their under-performance, their subsequent ‘bonus risk’, and ultimately their ‘job risk.’ Verily, many of the portfolio managers we know remain under extreme pressure to commit their outsized cash positions in an attempt to ‘catch up’ to their benchmarks between now and year-end (see the nearby Credit Suisse institutional cash versus retail cash on the sidelines chart).”
He also isn’t buying all the fearmongering that was going on at the end of last week when Meredith Whitney proclaimed her questionably “new” bearish stance and Nouriel Roubini reaffirmed his bearish stance:
“As the S&P 500 traded out to new reaction ‘highs’ in the first part of last week we heard a cacophony of crybabies. First was Meredith Whiney, banking analyst now turned strategist, who stated, ‘I have not been this bearish in over a year!’ One-upping her was Nouriel Roubini who exclaimed, ‘The worst is yet to come’….Despite such cantankerous cries, we have indeed entered the strongest seasonality of the year and we remain constructive. As the sagacious Bespoke Investment Group writes, “Since 1941, the Dow has averaged a gain of 0.50% in the week before Thanksgiving.” That said, we would not like to see the S&P 500 break below 1083. And speaking of breaking down, the Japanese stock market is breaking down and we are close to ‘uncle points’ on those recommendations.”
How does Saut recommend playing the year-end rally? Saut has been mindful of the recent divergence between large caps and small caps. He believes the trend will continue as breadth narrows and investors reallocate capital from the best performers to a bit of more defensive posture. This means large caps will outperform. In particular, he likes pharma stocks:
we continue to think the improving fundamentals, and earnings, will serve as the “carrot in front of the horse” to keep investors chasing stocks even if we do get a near-term pullback. That said, we expect the breadth of the rally to narrow, which is why we have been favoring large caps (hopefully with dividends) versus small caps for the past few months. Big cap pharma is of particular interest to us. Worth noting is that in Friday’s Fade many of the pharmaceutical stocks rallied, potentially telegraphing that the hastily conceived healthcare bill is not going to pass.