The mark of a great basketball player is the ability to maintain “court vision”—an understanding of everything happening on the court—while simultaneously passing, blocking, and shooting.
Former collegiate basketball player Doug Ramsey is constantly balancing this dynamic, only in a different arena. As chief investment officer of Minneapolis-based investment-research firm Leuthold Group, Ramsey oversees the firm’s extensive macroeconomic research, which it publishes in its widely followed Green Book.
At the same time, he is a co-manager of two funds, the $614 million Leuthold Core Investment (ticker: LCORX) and the $29 million Leuthold Global (GLBLX). The former is a 25-year-old tactical allocation fund that aims to keep pace with the overall market but with less risk. Since its inception through the end of July, it has returned an average of 8.5% a year, versus 10.1% for the S&P 500 index, though with significantly less volatility.
Ramsey, 55, and his co-managers have a great deal of latitude to shift the fund’s stock allocation, which was recently net 53%, and focus on industries benefiting from specific themes. Those roles can sometimes seem at odds, especially now.
Barron’s spoke with Ramsey about today’s market, and where investors can pick up some points. An edited version of our conversation follows.
Barron’s: We have seen a vintage stoplight in your office that changes color based on Leuthold’s Major Trend Index, a barometer of 120 market indicators. What color is the light?
Doug Ramsey: I’m a creature of habit, so I’ve been in the office recently. The light is yellow right now.
Are you generally pretty bearish?
No, but I would argue that this market—and by that I mean the past three or four years—has carried valuations to heights I didn’t expect to see again in my career. I was of the view that the late-1990s stock mania was a once-in-my-lifetime event, and here we are just 21 years later and I would argue that this market is, broadly speaking, more expensive than what we saw in the tech bubble. Back then, the high valuations were concentrated in the top 40 to 50 stocks. Today, the median stock valuation across the market is the highest it has ever been. At the end of July, the S&P 500 median normalized price/earnings ratio was 34.2. In February of 2000, the month-end peak of the tech bubble, it was 22.2.
What’s driving this?
The Federal Reserve is subsidizing stocks by keeping interest rates this low. It’s interesting—six months ago, the bulls were saying that high valuations are justified because of low inflation and low interest rates. Well, now they say it’s because rates are low and inflation has spiked up to such a degree.
They also say the economy is expanding. What’s your take?
It’s not as if we went through a long, wrenching recession. It was short and intense. And then the Fed decided to dump extra liquidity into the markets, stimulating this wealth effect. Look at retail. At the peak earlier this year, retail sales were as high as they would have been in 2026 had the prevailing five-year trend just been extrapolated. In other words, we pulled forward five years of growth in retail sales. That dropped on the top lines of Corporate America and subsequently the bottom line. So we’re going to have record margins with the next couple of quarters. But the issue is: What’s the run rate when we don’t have crazy spending that is subsidized?
What happens next?
I think this shapes up to be a shorter and maybe more powerful economic cycle than the last economic expansion. Certainly, there are some parts of this expansion that are only a year old, but there are also some holdover excesses—like corporate debt. Corporate borrowing usually declines a bit during and after a recession, as companies pull back on capital expenditure and rebuild liquidity. Instead, it grew during the recession and is making new highs on both an absolute basis and relative to gross domestic product. This expansion is older in character than it is on the calendar.
And then you have inflation. The consensus view is that if this inflation lasts only through year end, then the stock market will be fine. I think the stock market has become so large relative to GDP that it has actually become a driver of this inflation problem, to some extent. So, the duration of this economic expansion depends in part on both the stock market and inflation.
How so?
There’s no doubt that the tremendous gains that people have racked up in the stock market are contributing to that hot housing market, especially on the higher end. And that trickles down to even moderately priced properties.
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.
How do you implement that view with the Leuthold Core Investment fund?
The fund’s mantra is making it and keeping it. We tend to run maximum equity exposure near the low of a cyclical bear market, and in 2009 and into 2012 there were points where the fund was almost considered too aggressive for that tactical space. That has come full circle, or I should say half-circle, to where we’re viewed as quite conservative.
Our net equity exposure is now 53%. We’re 64% long equities in the select industries we like, but we have 11% in a diversified, quantitative short-selling strategy we’ve been using since 1990. It looks for fundamentally vulnerable stocks that have also exhibited some relative strength deterioration.
What about the rest of the fund?
Chun Wang is the primary manager on fixed income, which is 17% of assets. That’s about as light as we’ve ever been on fixed income because we think forward returns are so poor—over the past five years, the total return of the 10-year bond is zero after inflation. We also own some gold, and 4% of the fund is in cash.
How are valuations globally?
Valuations are much more reasonable outside of the U.S., which is something we have seen for a while. Our global fund recently had 55% net equity exposure, with 64% in long holdings and 9% short.
How do you reconcile your concerns about valuations with what is still a pretty big equity position?
We use relative strength work to sniff out some of these winning thematic groups. Then, once those attractive groups are identified, we tend to become more value-oriented in picking attractive stocks. If we were to have a sharp correction, there’s still a good chance that, if we’re parked in the right themes, we stand to outperform.
Because mid-caps and small-caps are cheaper, we have moved more in that direction in the past year. Six or seven months ago, we coined our own take on the TINA [there is no alternative] acronym and we call it Samara—smalls and mids are relatively attractive. Relative to the S&P 500, mid-cap and small-cap stocks are in the bottom decile of valuation.
What themes do you like?
We like investment banking; we own Goldman Sachs Group [GS] and Morgan Stanley [MS]. Rising interest rates are likely to benefit the financial-services sector in general, but they’re still on the value spectrum. Within investment banking, the deal flow has been historic and I think will continue.
We’ve owned the semiconductor equipment stocks, such as Lam Research [LRCX] and Applied Materials [AMAT], for about five years, and continue to like that space. The semiconductor industry has always been viewed as highly cyclical, but you’ve seen the narrative change to an industry that deserves a higher multiple because of steady and growing demand. And now with Covid-19, we have this enormous chip shortage.
It’s a similar story with home-building, which we’ve owned for about four years. You could argue that for the first seven or eight years following the financial crisis, we significantly underbuilt housing—and you can’t close the gap overnight. Our stocks, which include D.R. Horton [DHI] and PulteGroup [PHM], are up more than the market over that period, and we still like the valuations.
Hold on. Didn’t you say the stock market is fueling home-price appreciation?
This is an example of believing our macro work, but also our thematic work. If you did see a meaningful market setback, the very high end of housing would cool down. But as long as it doesn’t trigger a U.S. recession, there would still be a need for more moderately priced housing, which is where most of the major home builders are focused.
When your friends ask you for investing advice, what do you say?
I’ve been cautious enough for long enough that I try to refrain from talking people out of extremely high levels of equity exposure. I’m 55 and have friends whose portfolios have done so well they’re retiring in a few years, and they have 70% or 80% of their assets in equities. That’s a pretty big number. But I guess I’m somewhat disadvantaged by my appreciation of history. I probably do have more of a glass-half-empty bent on the markets, but some of it’s just my risk tolerance.
Thanks Doug.
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