Broker Talk: Who Hit 'Pause' on the Rally?

After a long run-up, stocks just had their first down week since May. The economic data are mixed and buyers are taking a break. But for how long?

Who’s Talking: Jeffrey Saut, chief investment strategist, Raymond James

The Gist: The market will trade “sideways” this summer, putting off any sharp gains. But not to worry: The economy will look better than expected by year-end as government stimulus kicks in.

Last week Jeffrey Saut said it was a mistake to get too bearish on equities. Three days later, on June 18, he said “caution is warranted” and that the market could see “a deep downside correction.” Saut’s recent commentary, it seems, is nearly as confusing as the market itself. So what does he really think? “We too are somewhat confused,” he says.

Saut explains that any 40 percent market run-up, such as the one we saw over the past three months, is likely to be followed by a correction. But if history is any judge, that doesn’t mean it’s time to go bearish again. In the 2003 downturn, the market bottomed in March at 800, and then the S&P 500 ran up to a June high of roughly 1000, explains Saut. For the rest of the summer, the market “flopped and chopped,” he says, but it “never gave back more than 6%.” By September, the market was climbing again and continued its upward trend through the 2004 new year.

Saut doesn’t envision sharp growth after the summer, though. At their current prices, stocks would need solid economic growth to drive their gains, he says. And that kind of growth is unlikely considering the most companies would need to fuel business growth. That financing usually comes in the form of corporate borrowing, and the country is in a “debt deleveraging mindset.”

But, Saut says, the economy will look better than most think by year-end because of government programs and incentives. The question, then, is whether last week’s market ‘wilt’ is the start of the correction Saut predicts. Perhaps, he says and that is why he remains “cautious” but not “too bearish.” The first stage of a rally, he explains, is typically driven by liquidity, after which the markets tend to “rest” until economic recovery shows itself, which typically spurs another rally.