CJ Lawrence Models and Tools That Have Stood the Test of Time, Terry Gardner, C.J. Lawrence 1/18/23
In this video, Terry Gardner introduces us to three CJ Lawrence investment models, created in the 1970s and 1980s, that have stood the test of time.
Hi, good evening, everyone. This is Terry Gardner from CJ Lawrence. It is January 18, 2023. I hope your year is off to a good start. The market has had a good start to the year, and we hope that continues. We are currently in the early innings of fourth quarter 2022 reporting season, so we’ll follow up in the coming days and weeks on how earnings are coming in from last quarter and what the outlook is and how it is forming for the rest of 2023. Additionally, we will discuss some cross currents that we’re seeing in the markets and the economy, and we will do that in another video.
We are going to mix it up a little bit today. I want to take you inside the CJ Lawrence investment process and discuss a few of the proprietary models and tools that we use to help inform our views. This morning, as we do every Wednesday, we meet as an investment committee, we review our portfolios, we discuss the macro backdrop, and we discuss new ideas.
Some of the models and the tools that we utilize in that discussion were developed in the 1970s and 1980s by our Chairman, Jim Moltz, who served as CEO and Chief Market Strategist for the original CJ Lawrence for decades. If you knew the original CJ Lawrence, you knew the firm as one steeped in research and in macro insights. The list of CJ Lawrence research alumni reads like a Who’s Who on Wall Street. I’ll mention a few of the names, including our chairman Jim Moltz, who served as Chief Strategist as I mentioned. Ed Hyman was the chief Economist for decades. He is currently the Chairman of Evercore ISI and has been a top-ranked economist for many years. Charlie Maxwell, the legendary energy analyst and strategist, was a CJ Lawrence fixture. Nancy Lazar, Economist at CJ Lawrence, became the CEO and founder of Cornerstone Macro, which is now part of Piper Sandler. Edward Yardeni was the Chief Economist at CJ Lawrence as it transitioned to become Deutsche Bank Securities in the early 1990s. Jim Murray, who was my Co-Director of Research at the time and was the gaming analyst, went on to become the CEO and Chairman of MGM Resorts. Tom Galvin, the former autos and transportation analyst now runs the Columbia Select Large Cap Growth Fund. Dana Telsey a name that you’d recognize if you follow retailers or the financial press. She is often on discussing retailer results. She is the CEO and Founder of Telsey Advisory Group. Aldo Mazzaferro, a top ranked Steel Analyst for many years. Peter Appert, the same in Media, was the former Director of Research at CJ Lawrence and a top-ranked media analyst. And of course, my predecessor Mark Spellman, who is now a portfolio manager at Alpine Woods. Just to name a few. I am sure that I forgot some and I’m going to get some nasty emails and calls tomorrow from some of the top people who came through the halls of the original CJ Lawrence who I failed to mention. I apologize in advance.
Now to the point. There were a couple of tools and models that portfolio managers and analysts really relied on, and that CJ Lawrence was famous for.
The first tool being the CJ Lawrence Market Monitor. The Monitor is meant to give a reading of the current environment and the competitive comparison between stocks and bonds. The Monitor is comprised of six components, two of which are fundamental models that compare earnings yields on stocks versus bond yields. The next two components are interest rate sensitive models. They compare year-over-year performance in bonds as well as rate-of-change. The final two components are technical and breath measurements. So, six components. Where does the monitor currently stand? It’s at a neutral. The two fundamental components are in a neutral position so bond yields versus stock yields. It’s a real tug of war there.
The next two components of interest rate sensitive models are both in negative territory. As you would expect, as rates rise, that’s obviously not positive. In fact, it’s negative for stocks. And then the technical and breath components, the final, two are in positive territory. The Monitor is not giving us a very strong signal right now. It’s leaving it to us to sort out where the market advantages are.
The second model that we use is what we affectionately call the Sector shifts Model. This model measures, going back to the 1980s, and even before then, the sector weightings within the S&P 500. What it shows us is how, over long periods of time, sectors rise and fall in prominence and in weighting within the index. It can help us identify sometimes, inflection points where certain sectors are regaining prominence with investors, where stocks in those sectors are performing better than they have in the past, and are gaining recognition, acceptance, and weighting within the Index.
We’ve seen that more recently with energy shares, which were out in the woodshed for years but now have bottomed out in terms of their prominence within the Index and are on the rise. Conversely communication services are going in the opposite direction, losing weight, and losing prominence within the Index. We pay attention to that because it helps us identify some long-term trends.
Finally, there is The Rule of 20. The Rule of 20 is a tool that you may have heard other strategists and economists cite over time in their work, but few actually attribute the Rule of 20 to CJ Lawrence. We have a high degree of confidence that the Rule of 20 was a CJ Lawrence creation, likely back in the 1970s. In fact, I have a copy of a Weekly Market Comment, this is from November of 1982, where if you can see Jim Moltz talking about PEs and The Rule of 20.
The ratio has been around for a while; The tool has been around for a while. We welcome anyone that claims the creation of The Rule of 20 to feel free to shoot us a report that precedes November of 1982. We’re happy to give you credit for it.
Importantly, all kidding aside, the rule is a very simple ratio of measuring the PE of the market added to the rate of inflation. Surprisingly or unsurprisingly, unremarkably, going all the way back to 1928, the sum of those two components has historically averaged around 20. When we look at the market today and we see a price earnings multiple of around 18 times forward multiple, and if you use five, six percent inflation, seven percent inflation – whatever inflation number you want to put in there – then add the two together, you’re getting somewhere around 23 or 24, suggesting that the market multiple may be a little rich.
Those are a couple of tools that we use and discuss in our meetings. I thought I’d give you a glimpse into that process. Again, in the coming weeks, we’ll circle back with more on earnings and the cross currents that we’re seeing in the market.
In the meantime, if you’ve got any questions about the three models and tools that I discussed today or about your portfolio, feel free to give me a ring at 212-888-6403, or email me at TGardner@cjlawrence.com. I hope everyone has a great rest of the week. Thanks.