In the five years since it hit a demonic low 666 the S&P500 (^GSPC) has nearly tripled. After that historic run Well Capital Management’s Jim Paulsen says investors should position themselves to win in a choppy stock market but growing economy.
“I’ve been saying since the beginning of the year that we’re going to have a really volatile stock market that ends essentially flat,” says Paulsen in the attached video. The current rally could very well pick up steam as growth comes in better than most people are expecting but a faster economy comes with its own headaches and has to be considered fairly well priced into the market at this point.
That leaves investors with a couple options. One option is to try to get cute and time the downdraft he sees coming after the S&P reaches his target of 2,000. That could work for the fast traders but Paulsen’s preference is using a so-called barbell strategy of getting long cyclical growth and goosing it with high-yield utilities.
“The two extremes of the ten sectors of the stock market would be utility stock which is the most defensive sector. There is then basic materials stocks which might be the most aggressive.”
Paulsen’s theme is that rising commodity prices are going to lead to higher interest rates. As basic material prices move higher on demand Paulsen thinks the utilities will get bid higher by investors looking to long yield.
It’s a tricky window to slip through but using a barbell approach lets investors avoid portfolio churn while staying in position for the extreme moves to which we’ve gotten accustomed. If the year plays out the way Paulsen envisions his strategy will help investors keep their pump if and when this rally takes a long-awaited breath.
Merrill Lynch is not responsible for the editorial content of this blog