Since Breakout started, Jim Paulsen of Wells Capital Management has come on the show regularly and expressed a bullish view. Despite weak earnings, fiscal cliffs, debt-ceiling debates and downgrades, he's been right. Now, he's doubling down on his bullish view for 2013.
"Next year will probably be the fifth consecutive year of positive equity returns," Paulsen says in the attached video. He's looking for double-digit returns without the terrifying dips and rips we've seen since the bullish streak started in 2009. Ironically, he thinks gains in 2013 may be the hardest to justify from a fundamental perspective.
It's not the earnings that are going to drive us, he says. Earnings growth and margins have been tailing off hard over the back half of 2012, and Paulsen is looking for more of the same in the months ahead. What will move the markets higher in Paulsen's estimation is a willingness of investors to pay up for each dollar of earnings in the S&P 500.
That willingness to ascribe more value to earnings is what drove the bulk of the market's gains in 2012. By Paulsen's math, the S&P 500's price-to-earnings (P/E) multiple has gone from 13x to 14.5x over the course of the year. That works out to an 11.5% gain on what each dollar of EPS is worth, accounting for most of the year's appreciation.
Why the confidence boost? Pointing to the last four years, Paulsen says investors have been assuming the end of the recovery every year. This "cultural mindset" been based on any number of forces, both real and imagined.
Entering 2013, we'll have some sort of resolution on the fiscal cliff, for better or worse, Europe steadying and China's new leadership team promising stability. Nothing has particularly improved, but the worst has been avoided. Eventually, investors are going to notice and start shifting assets into stocks and out of bonds.
Ironically, if Paulsen is right, it will be time to start selling. If there's one thing about which investors can be confident, it's that fading the assumptions of the masses can be lucrative. For now at least, that means being positive on the markets heading into year five of the recovery.