Fin - Breakout - US

S&P Could Hit 1,400 by Year-End: Paulsen

Jeff Macke
Breakout

By now it should be clear that the Breakout hosts are less than sanguine about the near-term outlook for stocks.

If not, let it be said here and now that Matt Nesto and I think the stock market may be soft over the summer. Since you most likely already knew of our concern for stocks, we welcomed Jim Paulsen, Wells Capital Management's chief investment strategist, to the show to explain the bullish case.

Nesto and I took turns letting Paulsen respond to the bearish brooding item by item. Before continuing, I suggest you take a quick listen to the most positive song I could think of courtesy of Monty Python.

Now, open your mind while I let Paulsen's bullishness drive this column.

We addressed the economic data getting no better, which can't be good for the shaky recovery. Paulsen isn't blind. He sees the weakness. From his perspective the spate of disappointing data is "definitely a soft patch" as opposed to a chilling portent of a financial dystopia. Paulsen correctly notes that unemployment is a volatile report and is frequently revised. And the May data were influenced by certain conditions that are either one-off events or factors that are already reversing -- "fallout" (his word) from the Japanese tsunami, the conclusion of a commodity bubble that peaked early in May and a spate of horrific weather.

Yes, the weather. Paulsen and others estimate that aberrant weather patterns took as much as 1% out of economic growth in the first quarter. He offers that the weather will surely be better in the second half of the year. As a native Minnesotan, I understand, because we're always saying the weather will improve. That said, Paulsen is in fact correct on 2011 being meteorologically "weird" thus far. I would elaborate on the abnormal weather, but it feels like it's 114 degrees with 103% humidity right now in New York City, and I have to wipe down my keyboard every time I lift a pinky finger to hit the shift key.

Paulsen points out that the U.S. has doubled the growth rate of employment year-over-year. And private payrolls, as opposed to jobs for which your taxes pay, are up over 50% from last year. It's thin gruel for the folks in the unemployment line, and we'd all be better off with faster job growth, but the trend is in fact, higher.

Couldn't stocks moving higher also be regarded as a one-off trend that's already reversing?

"Nothing moves in a straight line," says Paulsen. Again, scoff if you want, but he's correct. The best bull markets are those that pause intermittently to shake out the weak hands prior to resuming an uptrend.

Is the end of QE2 going to remove the artificial support at the core of this meager growth?

Nope, Paulsen doesn't care at all whether QE3 happens. "QE3 would be like taking a bucket of water and dumping it into the vast ocean of liquidity (created by QE's 1 and 2)," he says. We may quibble as to whether the Fed goosing the economy with another QE3 would be horrific or a non-factor, but at this point I think bulls and bears can agree that more quantitative easing is unlikely to be the answer to the moribund economy.

OK, OK. "Soft patch," "one-time headwinds," "QE3 is irrelevant"... we get it. What's the bottom line?

The summertime blues are "setting the foundation maybe for a run to 1,400 by year-end," according to Paulsen. This foundation-setting is creating a favorable investment environment in large part by weeding out the hyper-enthusiasm present at the beginning of the year. Paulsen notes we've gone from 55% bulls and 20% bears coming into the year, to bears outnumbering bulls by 10 percentage points currently.

Paulsen offers that the S&P 500 is trading at 13x forward earnings estimates. This is either rather cheap historically or evidence that most Wall Street analysts couldn't see an economic slowdown coming if it had flashing lights and a blaring horn, depending on your overall take.

There it is, a flat-out bullish argument from an entirely respectable, well-spoken, salt of the earth Minnesotan. Disagree if you will, but if you don't take time to listen to traders on the other side of your position you're at a significant disadvantage. Regardless of who you are, you aren't always right.

All of that said, we welcome your thoughts and observations in the comment section below or via email at breakoutcrew@yahoo.com.

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