Tags: Paulsen | investor | sentiment | stocks

Wells Capital's Paulsen: Strong Investor Sentiment Threatens Stocks

By    |   Wednesday, 08 April 2015 07:00 AM


The S&P 500 index stands less than 2 percent from its record high, but Jim Paulsen, chief investment strategist for Wells Capital Management, sees risk for stocks in the near term.

"Recently, we have become concerned about three major challenges facing the U.S. stock market — investor sentiment has become a bit too calm and confident, valuations are a bit
too extended, and interest rates finally seem likely to soon be reset higher," he writes in a commentary provided to Newsmax Finance.

"We continue to expect the stock market to eventually navigate these challenges and most likely the bull market will persist for several more years. However, until these issues are addressed, the stock market seems likely to struggle, remain more volatile, and perhaps suffer a correction."

A correction is generally defined as a loss of at least 10 percent.

As for investor sentiment, a gauge of it called R-squared provides room for concern, Paulsen says.

When it comes to valuations, the S&P 500's trailing price-earnings ratio stood at 20.25 Friday, up from 17.69 a year ago, according to Birinyi Associates.

And on the interest-rate front, many economists expect the Federal Reserve to begin raising rates in September.

So what's an investor to do?

"Our advice is to stay overweighted equities but to diversify away from the U.S.," Paulsen explains. "Most international markets have underperformed U.S. stocks in the last few years and currently offer more attractive valuations."

Robert Johnson, president of The American College of Financial Services, is more strongly bearish about the impact of Fed rate hikes on stocks.

"Given that in the future rates can do nothing but go up, my advice is for investors to psychologically prepare themselves for lower equity returns over the near future and most likely for years to come," he tells MarketWatch columnist Robert Powell.

The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008.

"Given that by most traditional valuation metrics (P-E ratio, dividend yield, and the like) the stock market is richly valued in comparison with historical norms, any significant change in monetary policy to a more restrictive stance would seem to represent a perfect storm for a stock market correction," Johnson says.

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The S&P 500 index stands less than 2 percent from its record high, but Jim Paulsen, chief investment strategist for Wells Capital Management, sees risk for stocks in the near term.
Paulsen, investor, sentiment, stocks
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2015-00-08
Wednesday, 08 April 2015 07:00 AM
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