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Confidence Will Drive the S&P 500 to 1,700: Paulsen

Breakout

No matter what efficient market theorists say, there is no "correct" value for assets. No matter how sophisticated a valuation model is, the whims of human nature can render it useless. According to Jim Paulsen, chief investment strategist at Wells Capital Management, an improvement in our collective mood is the best thing stocks have going for them and may be enough to take the S&P 500 (^GSPC) to as high as 1,700 by the end of the year.

So far, each year of the recovery has had a "wait until next year" quality to it. Double-digit stock returns in 2012 masked economic growth that badly lagged expectations, even before Wednesday's stunning negative GDP print for Q4. Paulsen thinks U.S. growth breaks that streak this year, helped along by a forecast for just 2% growth.

Regardless of the weak GDP read and a weak read of the Consumer Confidence Survey conducted by the Conference Board, Paulsen sees evidence of improving sentiment all around us. Housing numbers are improving, people are buying houses again and employment data is getting better.

In the bizarro world of modern investing the biggest hurdle to stock gains driven by an improving economy and confidence is that things may get too good. The biggest unknown is what will happen when the unprecedented stimulus ends. The Fed has said they're targeting 6.5% unemployment rate. Every step in that direction brings us closer to life in a world without Quantitative Easing.

The worst-case scenario is that the entire market improvement since 2009 has been a mirage. Paulsen disagrees, saying with just a whiff of trepidation, that the market isn't simply running on a sugar high and will be able to withstand the loss of the Fed's $80 billion-plus dose of monthly medicine.

We've got at least two quarters and one brutal sequestration debate in front of us before, what Paulsen calls, our "fiscal obsession" fades and attention shifts to the Fed. For better or worse, Americans have gotten used to the noise out of D.C. in the last few years. If we can collectively handle a little more without driving individuals back into buying bonds yielding nothing, Paulsen's 1,700 target may not prove as aggressive as it seems.

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