Where some analysts fear the stock market’s run-up is losing steam, Jim Paulsen, chief investment strategist at The Leuthold Group, found four reasons why stocks are set to tear higher.
The stock market may have erased its 2020 losses, but investors remain mostly bearish and invested in safe-haven assets. This caution could give way to strong buying activity if economic sentiments improve, Paulsen said.
The Fed’s monetary policy cushion, the US economic bounce-back, and hiring activity can similarly boost stock prices in the coming months, he added.
Here are the four reasons Paulsen sees stocks moving higher.
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Some analysts are growing more concerned that the stocks’ valuations are overextended, but Jim Paulsen, chief investment strategist at The Leuthold Group, sees several reasons why “the horses have just begun this race.”
The S&P 500’s rally cooled through July after erasing year-to-date gains and entering a volatile earnings season. Several experts point to rising jobless claims and weakened consumer spending as a sign of continued virus damage and a prolonged downturn. Others fear exiting now would lead to missed profits.
The market is in the middle of a Superfecta, Paulsen said in a Thursday note, evoking the term for when a horse-race gambler correctly picks a race’s first four finishers. Prices will endure a handful of pullbacks and corrections, but the collection of positive drivers should keep investors from selling off just yet, he added.
Here are the four factors Paulsen thinks can lead stocks even higher in the months ahead.
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The Federal Reserve’s monetary easing largely relaxed investors’ concerns, but market participants are still unsure how to handle their portfolios, Paulsen said. A mix of behavioral gauges suggest investors remain risk-averse. This reservedness forms a “wall of worry” to support the market from falling too sharply, the strategist said.
Investors have rotated from stocks to safe havens in recent weeks, leaving plenty of room for new stock-market inflows. Growing holdings in gold and cash assets also point to an overall bearishness, as do flows into bonds and out of stocks. Historically, such moves away from stocks eventually drive prices higher when bullishness takes hold, Paulsen said.
“Can the market ‘sustain’ a meaningful decline when so many investors have already sold risk assets and are waiting for a pullback to boost positions at a ‘perceived’ better entry point?” the strategist said.
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Race for round two
Just because the Fed’s boost died down doesn’t mean it’s gone. The stock market has likely never rested on so strong a policy foundation, Paulsen said, and the widespread relief measures passed earlier in the year are now …read more
Source:: Business Insider