Paulsen: Stocks to Surge Amid Robust Recovery

Thursday, 25 Feb 2010 08:20 AM

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The U.S. economy is beginning a “robust economic recovery,” says James Paulsen, the chief strategist of Wells Capital Management.

“That bodes well for stocks, even though the market performed so strongly last year from the March-panic lows. We won't see a moon shot like last year. But I think there are plenty of good fundamental underpinnings,” he said.

During 2010, investors could see the S&P 500 increase to 1,350, he told Barron’s. The S&P 500 was recently at 1,105.24.

“Longer term, the recovery cycle is likely to follow one of two scenarios. The first would see a strong recovery and a surge in corporate earnings," he said.

"Stocks would certainly make a lunge toward their all-time highs of, say, 1,565 in the S&P and likely reach those levels.”

If inflation is averted, Paulsen says the economy will have a “real shot at a prolonged secular bull market. The key will be keeping inflation under control a couple of years out, when the recovery is in full swing.”

Paulsen is optimistic about both stocks and the economy. He predicts that GDP growth will rise to 5% from 3% to 4%.

“Liquid-asset holdings of households and businesses now stand at around $10 trillion. That's a record, relative to GDP," he said

"This money is likely to act as a slow-release Tylenol tablet over the next several years, leeching into the market and driving stock prices higher. Stock prices should also be bolstered by low core inflation," he said.

"Finally, you've got accelerating global growth, particularly in the developing world. Thus, we're likely early and not late in the stock bull market.”

The weak labor market will prevent the recovery from moving quickly, said Federal Reserve Bank of Minneapolis President Narayana Kocherlakota, Dow Jones reported.

"I do think that the economy is on the mend, and should continue to recover over the next two years in terms of both GDP and unemployment, but at slower rates than we would like," he said.

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