Keeping His Fingers Crossed

Jack Ablin CIO & Exec. VP, BMO Private Bank

Jack Ablin uses a variety of technical tools to determine his outlook for the market in 2014, which, for the most part, is fairly positive.

TERRY:  I’m Terry Savage and our guest today is Jack Ablin.  He is the Senior Chief Investment Officer for BMO Private Bank.  That’s 60-some billion dollars worth of investors’ money that you make asset allocation decisions for, Jack, so I’m glad you’re here.

JACK:  Thanks Terry.

TERRY:  My big question is, we had an incredible 2013, through $14,000, $15,000, $16,000.  What can the market do this year?

JACK:  Yeah, so as we look out at a 2014, there’s certainly a lot of high expectations built in.  I will say 2013 blew the doors off of our expectations.  I think we were calling for a 9.5% return last year.  Looking out into 2014, quite frankly, the market is overvalued.  Now, a market can stay overvalued, but it is a problem to get started when you’re in overvalued position.

TERRY:  Now, January has taken the valuations down somewhat, but when you say overvalued compared to other PE ratio levels or earnings, what exactly do you mean by that?

JACK:  I like to use price to sales, just because it’s a more consistent measure over time, and right now, we have a price to sales ratio of about 1.6 times.  That’s about 18 percentage points above its normal median average over the last 20 or 30 years, so it is a little high, but there are periods where we’ve stayed above that median for a while, so I’m not worried that that’s the one thing that could cause a problem.  The good news is we’ve got an economy that’s growing and accelerating, so we’ve got job growth, we’ve got housing, we got manufacturing.  It seems like our economy is really firing on almost all those cylinders, and that’s a great sign.

TERRY:  But not as much as coming out of previous recessions.  Some statistics are disappointing in relating to home sales, and even the unemployments numbers are partly because people have left the work force.  Are we strong?

JACK:  Well, I would say we’re strengthening.  In fact, probably the common refrain that I hear from my clients, many of whom who own businesses, and this is probably consistently since last June, they’re having a difficulty finding qualified workers, so of all the problems to have, not being able to find qualified workers is not the biggest problem that our economy can face.

TERRY:  All right, let me take you back to the stock market.  Do you make forecasts for what kind of year-over-year growth you’d see, say, in the S&P 500?

JACK:  Okay, so let’s keep our fingers crossed that profit margins stay where they are, even though I would expect the dollar to rise and interest rates to rise, but let’s put that aside for a minute, and let’s say we get 3.5% growth in revenues over the course of the year, which is equivalent to roughly a modest nominal GDP number.  You multiply that times 1.6; that’s 5.5% gain in the index, add a 2% dividend yield, and  you’re at 7.5%.

TERRY:  So you’re looking for 7.5% gain year-over-year in the S&P 500 this year?

JACK:  Yeah, keeping my fingers crossed.

TERRY:  Okay, we’re talking to Jack Ablin of BMO Private Markets.  I’m Terry Savage from