At Morngingstar's annual investment conference last week, I sat down with Doug Ramsey, who is the Leuthold Group's chief investment officer. When he and his research team were putting out their June research book, known as The Green Book (for its color and its size), the S&P 500 was in a free fall. Leuthold, whose quantitative system predicted the market bottom in 2002 , says its system for picking stocks and sectors (based on a normalized 5-year earnings cycle, among many other indicators, says keep a bullish allocation. (See our website for my interview with Doug soon). His comments appear below.
[Full disclosure: I own shares of LCORX, the Leuthold Core Investment Fund , which is up 2.3% this year, through yesterday. LCORX does have a strong long-term track record.)
DOWN TEN PERCENT... IN A “BETTER THAN AVERAGE” YEAR?
As the S&P 500 danced around the -10% correction threshold, we looked at the market’s median or typical “maximum drawdown” from an interim high during a calendar year. The answer - a median loss of -13.5% on the S&P 500 (dating back to 1928) - was a couple percentage points more than we might have guessed, with that figure inflated by 16 consecutive double-digit, intra-year drawdowns over the 1928-1943 period. …
A “GARDEN VARIETY” DROP TO 1227?
We don’t want to be the bearers of bad news - and this is not our forecast - but in a typical or “median” year (to the extent we’ve ever lived through such a year), the S&P 500 would drop to 1227 (representing a -13.5% loss from the April 2 high of 1419). Such a collapse would no doubt send the masses running for cover, and I’m afraid, tip the Major Trend Index into bear territory.
But again, such a decline would merely be the median experience for the last 85 years. (And to think that, unlike in 2012, some of those annual losses occurred without an end to Western civilization!)
Some investors will no doubt be mortified to learn that a “typical” calendar year (again, if there were such a thing) contains a drawdown as large as –13.5%. (And it might lead a few of them to finally conclude that bonds really are the way to go, after all.)
We’re convinced the prevailing investment mania is not about absolute performance, relative performance, or any other kind of performance scheme asset managers crafted for their personal compensation. Today’s investment mania is volatility minimization: witness T-bill rates at 10 basis points, 10-year Treasury yields at 1.50%, and high-yielding stocks at P/E premiums far above anything recorded in history. Yet volatility is endemic to the game, and we find today’s cost of avoiding it to be exceptionally (and in most cases, unacceptably) high.