Breakout

Jim Paulsen's picks: 3 sectors and a stunner

Breakout

The S&P 500 (^GSPC) is up 5.5% for 2014 so far. There’s a very good chance that’s beating the tar out of your returns if you’re investing responsibly, and it’s almost certainly crushing your portfolio if you’re trading. It’s been an expectations-defying sort of year.

Related: Pundits baffled as S&P 500 makes record highs

If you’re one of the majority running slow, there may be some sector adjustments in order. Playing defense seems in retrospect and prospectively perhaps a little, well, defensive. In the attached clip Wells Capital’s Jim Paulsen offers U.S. sectors he thinks will outperform. As a kicker, Paulsen has a third sector that has been left for dead but in his view is set to outperform.

1. Materials & Manufacturing

“One of the dirty little secrets of the year is that commodity prices are going up,” says Paulsen. Secret or not, it seems to be fact. Paulsen, at least for now, thinks the commodity price rise is in the happy area between when prices drive higher, moving profits up, and when the Fed starts fighting inflation by slowing the economy.

2. Technology

Paulsen says the material price increases are going to continue and the manufacturing companies are going to win. By extension, some of the tech that drives the economy and benefits from capital spending will also see gains, thanks to more-aggressive investing by corporations.

“We are starting to get capital spending in the economy,” offers Paulsen. “The $2.2 trillion in dry powder is coming off the balance sheets.” First the money went to buybacks, then M&A as evidenced by the record pace of merger activity this year. The next step will be building, putting up “new-era technology” investments such as Tesla’s (TSLA) so-called Giga-factory.

3. Emerging Markets

Having made a compelling case for the health of the U.S. economy, Paulsen throws a swerve into the end of the segment by pounding the table on emerging markets. In part, his enthusiasm comes from the aforementioned fact that many investors are lagging the market this year and looking to play catch-up to the S&P 500.

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“I think (these stocks) have turned the corner,” says Paulsen, “If they have, there’s a lot of portfolios underweighted the emerging markets that I think are going to have to get back in."

Paulsen makes the fundamental case that emerging-market stocks are trading at a discount to the overall stock market. Typically, once they’ve bottomed, emerging markets become much more expensive than the overall tape before turning lower again. Of course, past is not always prelude when it comes to investing, but history repeats frequently enough to make these patterns worth noting.

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