Wells Capital's Paulsen: Economic Strength May Hurt Stocks This Year

Wednesday, 15 Jan 2014 07:33 AM

By Dan Weil

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U.S. economic strength, which has helped stocks rise to record highs repeatedly in recent months, may come back to bite the market later this year, says James Paulsen, chief strategist of Wells Capital Management.

"The biggest thing driving this market in the last several months is economic reports have continued to be better than most people's expectations," he told Yahoo. "That's good and may continue."

The economy grew 4.1 percent in the third quarter and the Standard & Poor's 500 Stock Index soared 29.6 percent last year.

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"I think at some point, though, the flip side of good economic momentum is going to become problematic," Paulsen noted. He's concerned that interest rates and inflation will rise.

Already the 10-year Treasury yield has climbed to 2.86 percent from 1.66 percent May 2.

Paulsen predicts stocks will appreciate early this year, with the S&P 500 possibly reaching 2,000. Then a 10 percent correction is possible, with the S&P 500 finishing the year around its current level of 1,835.

"I think it's going to be a different year than what we've had the last few years," Paulsen stated.

"Overall we might have a flat year."

Goldman Sachs strategists also see a good chance for at least a 10 percent correction, assigning a 67 percent probability to that outcome in an outlook obtained by CNBC.

"We believe S&P 500 currently trades close to fair value, and the forward path of the market will depend on the trajectory of profits rather than further expansion of the forward [price-earnings] multiple from the current 15.9," the strategists said.

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