Paulson: Understanding Indisputable Consensus and Unrecognized Themes

In an article in Canada’s Financial Post, columnist David Pett offers up some valuable investment insights from James Paulson, chief investment strategist at Wells Capital Management, who has been mostly correct in his stock market and economic calls since early in the bull market. Paulson explains that often, investors weight the consensus opinion in the market too heavily and lose sight about the factors that end up influencing what happens in the future. Paulson recently wrote, “combined, indisputable consensus trends and unrecognized themes can represent potential shocks to the investor mindset”. In Paulson’s view, there are five indisputable consensus themes and three unrecognized themes that investors should be mindful of.

Indisputable Consensus Themes

  • The strong US Dollar: Most think the US dollar will remain strong, but the unforeseen fall of the greenback could cause US product demand and wage increases, and cause the Fed to increase rates faster than many expect.
  • Low inflation: Inflation expectations remain low but the chances for at least moderate inflation are higher today than they have been in the past.
  • The momentum trade: As momentum stocks continue to advance, more investors seek exposure to the group. This could be an issue for investors once leadership in the market changes.
  • Buybacks: While the investment community has rewarded companies that have been buying back stock, those buybacks may decrease as growth picks up over the next few years.
  • Mergers and acquisitions: M&A activity looks high relative to overall economic output, but firms may start to find other more productive uses of cash going forward, particularly given the current levels of stocks.

Unrecognized Themes

  • Aging earnings cycle: The recovery is currently in its seventh year, making it one of the longer recoveries in US history. As a result, the market may experience more volatility going forward.
  • Investor sentiment and valuation: The combination of the market’s valuation and investors’ bullish sentiment is high.
  • An overvalued bond market at full employment: Most think that increasing yields will not negatively impact the equity markets in a material way. The article points out that “what is underappreciated is not just that yields are at very low levels, but that U.S. yields will soon rise from levels significantly below historical norms in an economy nearing full employment.”

Paulsen: Market Needs A Correction To Move Forward

Wells Capital’s James Paulsen thinks a much-needed correction is coming for the stock market.

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R-Squared Indicator Says Market Could Get Scary

Wells Capital’s James Paulsen has been bullish — correctly — throughout much of the bull market that began in March 2009. But now, Paulsen says that a key sentiment indicator that has predicted many former declines is flashing a warning signal.

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Paulsen: Wall Of Worry Weakened

Wells Capital’s Jim Paulsen says he thinks the market might climb some more, but then come back down amid headwinds that include high valuations and interest rate increases.

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Paulsen: Look Deeper at Valuations

Nearly six years into the bull market, the S&P 500 is trading at somewhat elevated but far from euphoric valuations. But in a recent note, Wells Capital’s James Paulsen says that doesn’t tell the whole story of the overall market’s valuation.

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Paulsen: Diversify, But Don’t Ditch Stocks

Wells Capital’s Jim Paulsen sees some short-term weakness ahead for stocks, leading him to recommend shifting some money from cyclical stocks into more defensive sectors.

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Paulsen: Cocktail of Factors May Spark Inflation Fears In 2014

Could 2014 finally be the year that long-simmering inflation fears boil over? Wells Capital’s Jim Paulsen thinks it just might be.

“In the last five or six years we’ve been worried about nothing but deflation and weak growth,” Paulsen tells Yahoo Finance’s Breakout, “so it’s very difficult to imagine that we might get to a point where we’re worried about an overheated economy again, but I think we’ve got a shot at that (this year).”

Paulsen says a number of factors — a new dovish Federal Reserve chairman, tightening labor market, rising factory capacity utilization rate, rising commodity prices — could combine to trigger inflation fears. “If you put all those together I think that could cause people to worry about overheating or inflation,” he says. To be clear, though, Paulsen is expecting only a small pickup in inflation this year. But he thinks that slight pickup could trigger bigger fears.