Jim Paulsen, the widely respected chief investment strategist of Leuthold Group, forecasts a sharp market rebound during all of 2019, per Business Insider. He recommends five core strategies for investors who want to take advantage of the rally, including buying materials, energy and industrial stocks as they benefit from a weaker dollar, as well as financial stocks amid an expected slow down in Fed tightening. To play on the continuation of a strong U.S. economy, Paulsen highlights small cap stocks. He also favors international equities, which he argues are cheaper and growing faster than their U.S. counterparts. Outside of the pricey FAANGs, the investor views less-popular tech stocks as well positioned to outperform.
"Small-cap tech stocks have been matching the performance of their larger brethren, many without facing the thorny and unresolved issues which currently challenge the FAANGs," says Paulsen. The market vet is more optimistic than many regarding whether the five-day bull rally through Thursday of this week will continue.
Paulsen's 5 Bull Market Strategies: What To Buy
- Financial stocks
- International equities
- Materials, energy and industrial stocks
- Small caps
- Smaller techs
Source: Paulsen; BI
‘Recession Avoided in Foreseeable Future’
While Wall Street became more pessimistic on a forthcoming recession during the latter part of 2018, Paulsen recently argued that a “recession will be avoided in the foreseeable future.” Unlike many of his peers, Paulsen does not view a flattening yield curve as signaling a recession. Further, he views private balance sheets as “remarkably healthy” for the economic rebound which has lasted roughly a decade. The investor cites strong US household net worth, up 60% from its previous all-time high, as well as declining household debt relative to disposable income.
Paulsen notes that while business and consumer confidence have just regained their old level of conviction, "lending and borrowing have not been excessive, consumers have not overused their credit cards or over-stretched into mortgages, and they have not run through their savings." He views a healthy dose of skepticism as good for the market in the long term, while overheating conditions have cooled off considerably, “almost ensuring” the central bank will not raise rates in the near future.
These positive tailwinds should help boost the S&P 500 index to between 2,800 and 3,000, according to Paulsen, representing an 8% and 16% respective rebound from Friday morning.
Taking Advantage of the Rally
Paulsen views financial stocks, which suffered last year from fears of rising rates, a flatter yield curve, wider credit spreads and broader market concerns, to make a strong comeback after these headwinds pause, or reverse altogether.
As for beaten-down tech stocks, the investor says FAANGs remain overly popular, recommending a portfolio overweight in tech but focused on smaller caps. Paulsen isn’t the only market watcher favoring smaller cap tech stocks. Per an earlier Investopedia story, analysts and investors are leaning into younger tech companies like Twilio Inc. (TWLO), Etsy Inc. (ETSY), Roku Inc. (ROKU) and Square Inc. (SQ), which have all sharply outperformed the market in 2019.
Paulsen likes small caps in general, forecasting “greater upside leverage to a period of renewed optimism” after they underperformed in 2018.
Meanwhile, a weakened U.S. dollar should raise commodity prices and improve the competitiveness of U.S. industrial activities, making shares of materials, energy and industrial sectors attractive bets.
Paulsen views international developed and emerging stock markets as presenting a better relative value than domestic plays, suggesting that they are under-owned in most portfolios.
“While U.S. economic growth may be slowing, growth may already be accelerating again abroad. And finally, a weak U.S. dollar would augment foreign investment returns,” he stated.
It’s important to note that if Paulsen’s optimistic view for 2019 falls through, these stocks could plunge sharply. Investors should maintain a well diversified portfolio to hedge against another series of downdrafts into the new year.
Down roughly 0.2% on Friday, the S&P 500 has gained 3.3% YTD after closing out 2018 lower 6.2%, marking its worst performance in a decade.