Should You Be Loving Stocks?

August 6, 2009
Michael Sheehan

What to think of the 50% rally on Wall Street from the lows of March? Doom merchants are doubting the rally's strength and predicting a return to market lows or worse. James Paulson of Wells Capital Management, on the other hand, believes the bears don't realize that the bulls are back in charge.

With its nearly 50% recovery from the lows of March, the stock market has brought some relief to jittery investors, but it has also led to some sweaty palms. Has the market come too far too fast? Several Wall Street analysts have cast doubts on the strength of the rally and some doom merchants are even predicting that stock prices will revisit the market lows and may go lower. In contrast, Barron’s is reporting that James Paulsen, a respected market strategist with Wells Capital Management, has come up with a bunch of reasons why investors should be taking a serious look at stocks.

Don’t sweat the 50% rally, Paulsen says. That number got blown out of proportion because stocks had sunk so low. What the rally did was get stocks back to where they were just before the financial world imploded; a new bull market based on fundamentals and economic recovery hasn’t even started yet. Also, according to Paulsen, stocks are still cheap despite the recent gains, with a price/earnings ratio of around 15. That’s the historic average, but with low interest rates and low inflation, it’s better than it looks.

Another plus for the future of stock prices is the current overwhelming bearish outlook on Wall Street. Once the bears realize that the bulls are back in charge, they will start buying, driving stocks up. And they’ll have plenty of money to buy with, according to Paulsen. He estimates that there’s about $5 trillion in investor cash sitting idle, ready to drive the market higher.