Two Excellent Barron’s Articles Clarify Today’s Stock Market Drivers, Conflicts And Reality

Two unique articles in Barron’s have Leuthold Group’s top investment experts taking one another on, offering insightful rationale for their differing viewpoints. The best approach is to read them in this order:

Jim Paulsen, chief investment strategist at the Leuthold Group, explains his contrarian bullish stance. It’s easy to get excited reading Paulsen’s views:

• As to the stock market’s high valuation, “Paulsen isn’t fazed. He carries the S&P 500 operating earnings estimate for 2022 of $220, above the consensus….”
• Regarding the warnings that the rising stock market has gone on for too long and is too high, “’I listen to the discourse,’ Paulsen says. ‘So many people are saying that the long-term returns on stocks will be miserable…. They’re not going to be 15% to 20% a year, but returns could be close to 10%.”
• Why the bullish outlook? “His optimism is based on an upbeat view on the U.S. economy, saying that growth may settle in at an annual rate of 3% to 3.5%….”
• Then there are all the supporting drivers. “Paulsen ticks off positive economic factors, including pent-up consumer demand, a need to rebuild inventories, a boom in ‘household and business formations, $2.5 trillion of excess savings, cleaned-up household balance sheets, and excess bank lending capacity.’”

Doug Ramsey, chief investment officer of Leuthold Group, reveals his interpretation of the stock market’s interlocking risk/return drivers and his strategy for dealing with them.

• This article is a fulsome interview with Ramsey. When asked if he was bearish, he answered, “No, but….”
• While Paulsen isn’t fazed by the stock market’s high valuation, Ramsey has a dramatically different view: “… I would argue that this market is, broadly speaking, more expensive than what we saw in the [1999-2000] tech bubble.” He also believes, “The Federal Reserve is subsidizing stocks by keeping interest rates this low.”
• (The previous article about Paulsen was in Andrew Bary’s column, “Up & Down Wall Street,” in which Bary made the same observation, “Stock market investors, meanwhile, owe a big debt of gratitude to bond investors, who remain willing to accept puny yields that badly trail the current 5% inflation rate and pump up equity values.”)
• As to economic growth, he believes both the stimulus actions and the “wealth effect” have helped pull forward five years of growth in retail sales.

The rest of the interview gets into his view of the interlocking drivers that could cause problems. One scenario he discusses is a stock market drop’s effects on inflation:

“The stock market today is so expensive that it almost represents a future disinflationary force. I mean, if stocks were to break lower by 20%, valuations would still look high, even relative to those that have prevailed over the past 25 years. But if you get a 20% drop, that’s going to wipe out a lot of the excess liquidity that has been chasing houses, art, new cars, used cars, those sorts of things. So, an inflation burst could almost be self-correcting.”

Finally, Ramsey reviews his strategy for this stock market and the potential moves the market could make in the future. (This is the payoff promised in the Barron’s table of contents title: “Six Stocks That Stand Out in a Pricey Market.”)

The bottom line: Neither a bull nor a bear be in this stock market

At the end of Ben Levisohn’s “The Trader” column in Barron’s (“Powell Says Little New. Stocks Like What They Don’t Hear.“), Ben provides an important reminder (underlined) about stock market investing reality…

“’This could spur a broadening of the stock rally and a second act for the reopening trade we saw in the first quarter of 2021,’ writes Charlie Toole, portfolio manager at Adviser Investments. ‘By the time the [Covid case] slowdown is apparent, reopening-trade stocks will already be on the rise.’

“Which isn’t to say there aren’t risks. As the previous week’s decline shows, the market can turn quickly—and often for no apparent reason, writes Gonzalo Asis, equity-linked analyst at BofA Securities. The fact that the selloff petered out so quickly only increases the odds that the next one, whenever it arrives, could be even more violent. ‘The selloff has come and gone, and equities back at new highs will merely encourage more of the investor behavior that historically precedes larger fragility shocks,’ Asis explains.

“And that’s true, taper or no taper.”