“That Was the Week That Was?!”

by Jeffrey Saut, Chief Investment Strategist, Raymond James

November 11, 2013

That Was the Week That Was, informally TWTWTW or TW3, was a satirical comedy program on BBC television in 1962 and 1963. It was devised, produced, and directed by Ned Sherrin and presented by David Frost. An American version by the same name aired on NBC from 1964 to 1965, also featuring David Frost. And last week was just such a week for me. The week began with a lunch with Bob Doll, who hangs his hat at Nuveen where he manages a number of mutual funds. Like me, Bob is bullish, believing that markets react to things on the margin and on the margin, things are getting better. He also thinks 2% - 3% GDP growth is a sweet spot for the equity markets. The next day I got an email from Jim Swanson, the sagacious strategist for MFS, who was thanking me for the “shout out” I gave him in a strategy report recently. He too believes a 2% - 3% GDP growth rate is a sweet spot for the equity markets. Jim recently wrote:

As we enter the fourth quarter and look back at 2013 so far, we could pessimistically conclude that this year has brought us more of the same sluggish 2% real growth that we have seen in the United States since the end of the last recession in mid-2009. Any comparison with the annualized quarterly growth rates of 4% or even 5% during the business cycles of the 1980s and 1990s is painful. ... [B]ut perhaps there is another way to look at the cycle. The real story might be that those 4% to 5% growth rates came at a cost we may not experience this time. In other words, we are not seeing bubbles erupt, as we did back then, when we all knew — or should have known — that recession was always lurking and the excessive credit expansion would come to an abrupt end. The current state of 2% growth is occurring without the exuberance of junk bond lunacy or the overreaching big company mergers and acquisitions on the corporate side. And on the household side, retail sales keep going up, even without Joe and Mary Consumer hocking the family home to buy a new outdoor kitchen or travel on a luxury cruise line. There is a strong possibility that the growth inherent and observable in this cycle is organic, simple and self-sustaining. If so, the post–World War II average cycle length of five years may well be exceeded by several years.

To Jim’s last point, about the average cycle being exceeded, Bob Doll told me he really liked my point about how the current bull move is not 56 months in duration, but 25 months. My view is that pundits don’t measure the 1982 to 2000 secular bull market from the December 1974 “nominal price low,” but rather from the “valuation low” of August 1982. Therefore, we should not measure the current bull move from the March 2009 “nominal price low,” but rather from the “valuation low” of October 4, 2011. QED, we are not 56 months into this move, but 25 months; and, for the record, the average duration of a bull move is 50 months.

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