When the S&P 500 first hit the 1,700 mark, it was evident the market is going to enter a trade range for the rest of the year, says Jim Paulsen, chief investment strategist at Wells Capital Management.
The market is going to digest three really big things now. First, will be digesting the big move it already had since last fall. There had been a 3x multiple increase (since last fall) in prices, the biggest multiple increase in this recovery in stocks, and the markets are kind of adjusting to higher valuations.
Secondly, the markets had to adjust to a significant reprising in long-term interest rates, which is still in progress and is likely to go to three percent or a little more by the year-end. Finally, the markets have to digest tapering, which is going to start by the end of this year. However, none of these events are likely to end the bull market, but investors are going to get frustrated for the next several months, maybe the rest of this year before they regain some confidence in 2014, Jim said.
Asked if the current sell-off in the bond markets indicates money is flowing into equities, Jim said it’s difficult to say if money is flowing out of bonds and into equities. But it can be said there’s a healthy price correction going on and markets are reprising bond yields, ensuring where they should be for a slow growing, but growing economy.
Nevertheless, it is forcing a little portfolio rebalancing as it is one thing to not do that well in bonds and quite another to get hit with bonds. Some of the people who lost money in the bond market may have decided to enter the equity market while there are others who may prefer to hold cash, Jim noted.
Asked why the markets are so worried about Fed tapering despite the Bank of Japan and the Bank of England ramping up their stimulus programs, Jim said there’s no doubt that the worry over Fed tapering is hyped up. The great Fed myth that this is just a big sugar high and as soon as they pull back everything’s going to fall apart, needs to be debunked.
The markets will probably remain worried for the next few months, but as investors figure out that the economy is able to stand on its own two feet, it will regain confidence going into next year.
Meanwhile, investors may want to move a little away from the US with their allocations and put more in overseas markets like Europe and Japan, in part because they are still accelerating stimulus while the US is going to start backing away. The US dollar is likely to continue to weaken for the rest of this year boosting overseas returns a bit, he concluded.
You can watch the video here.