If you saw Steve Leuthold in a hotel lobby and didn’t know who he was, you would probably think he was just returning from an ice fishing trip on a lake in frigid northern Minnesota. His laid-back and untailored demeanor and thick beard, though, belie his investment acumen. Leuthold is chairman of the $4.5 billion Minnesota-based Leuthold Group, where his funds have consistently outpaced their peers over long time horizons.
Leuthold was the keynote speaker at the Fortigent conference in San Diego last week, where he presented an upbeat short-term forecast for the US markets. For a summary of other, less rosy, presentations at that conference, see here.
Upside for the next six months
Leuthold prefers to forecast the economy, which he said he was dead right about for the last three years. The US economy bottomed in the fourth quarter of last year, he said, and is in a mild expansion. He expects 3.5% growth for 2010, which will lag the rest of the world with the exception of Europe.
“We are a mature economy,” he said, “having lost a great deal of our manufacturing base.” The US global companies he follows may compensate for that decline, he said; they derive more than half their revenue from outside the US.
Consumer spending will increase 1.5-2% over last year, although consumers remain over-leveraged, Leuthold said. “If you have a product that people like, they will find the money to buy it,” he said, which is why he expects this modest expansion in consumer spending to lead to growth in revenue and profits among companies.
“This market as we see it is about 16.5 or 17.5 times normalized earnings – not richly valued but somewhat overvalued.” He expects retail investors to continue to be net sellers of stocks, but institutions will build their equity exposure.
Relative good news from earnings announcements will lead to growing enthusiasm and a 16-20% gain in the stock market in the first six months of this year, and the S&P 500 will reach 1,300-1350 and a normalized PE of 19-21, at which point it will be “clearly overvalued,” he said. Those advances, Leuthold said, will be powered by “momentum, breadth, and divergence” – and not by fundamental undervaluation.
