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Jim Paulsen, Author, Paulsen Perspectives, explains why he thinks stocks have even more room to run.
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00:00As the stock market sits near record highs, my next guest says there are still plenty of relatively cheap stocks out there.
00:07Jim Paulson is former chief investment strategist at Wells Fargo and author of Paulson Perspectives.
00:12Jim, thanks so much for joining us.
00:15Well, thanks for having me.
00:17So, Jim, fill us in. Where are you still finding value amidst these record highs?
00:22Well, I guess I'm mostly attracted just to the amount of, you know, this has been a very narrow bull market, Caroline,
00:31and the amount of parts of the S&P 500 that are still relatively cheap, I think, is rather outstanding when we've had such a prolonged bull market now and we're near record highs.
00:44I recently looked at the 72 sectors or industry groups that make up the S&P 500 back to 1990.
00:52And I looked every month at the relative price earnings multiple of each of those 72 sectors and calculated what percent of them are below average right now as opposed to its average over the entire period.
01:08And I looked at that every month since 1990.
01:10And today we've got more than 76 percent of the sectors relative P's are below average within the S&P 500.
01:18And that's more than 76 percent of the time since 1990.
01:24There's only been one other brief minute, really, when there were more sectors below average in terms of relative P's than there are today.
01:33So I think there's a lot.
01:34But what's interesting about this, you can look at the market being narrow as a sign of a weak market, as some do.
01:40Or you can look at it as a sign that there's so many parts of this marketplace that have yet to be used in this bull market.
01:47And maybe they could catch fire in the latter stages here and keep this stock market alive.
01:53So just in general, I think there's quite a few sectors I could get into a couple of the main sectors I'm most interested in if you want.
02:01Yeah, get into those sectors, please.
02:04What are some of the value sectors right now?
02:06Because we have seen more participation, if you will, outside of tech.
02:13We have industrials higher, utilities higher.
02:16So it isn't just a tech rally.
02:18But to your point, it hasn't been as broad-based.
02:22So tell us some of the value sectors you found.
02:24Well, the places I would look right now is, I think a key to this is going to be, the reason we've had such a narrow bull market, I think, is because the Federal Reserve and this bull market has been tight throughout almost its entire existence.
02:41It's eased in three months late last year.
02:44And outside of that, it's been raising rates for being tight with monetary policy throughout the bull.
02:49It's a rarity.
02:50If I go back in post-war history, almost all bull markets begin with monetary easing and have easing going on during a substantial portion of the bull.
03:00This one has lived its entire existence under tightening.
03:03I think that's why it's been such a narrow advance.
03:06When you have tightening going on, monetary tightening, it kind of wipes out a lot of the general stock market that needs monetary liquidity, that needs lower interest rates to perform.
03:16And it puts us into the most kind of conservative, not really conservative, but unit growth companies there are that aren't as dependent upon policy easing to get their earnings.
03:27And that is the quintessential technology in here growth stock, which has been the pinnacle of this bull market.
03:35I think, though, the Fed's getting close to easing.
03:38If we can get this tariff thing resolved for too long, I think the Fed's going to ease into this and will be the first easing really on a consistent basis of this bull market.
03:48And I think that's going to awaken a lot of parts of the stock market we haven't seen yet.
03:54I think, you know, when we drop rates, you're going to, and the liquidity or monetary growth rate is going to pick up.
04:01And I think the biggest, one of the biggest beneficiaries is going to be small cap stocks.
04:06Overall, I know they've been left for dead.
04:08And I even have trouble saying, recommending them because they've been dead for so long.
04:12But I do think it's been tied to Fed policy.
04:14And if that changes, I think that's going to change right into the sweeping spot of small cap stocks.
04:20I would also point out, just in the last month or so, micro cap stocks have picked up a fair amount relative to small caps, the Russell 2000.
04:31And maybe that's a sign from the very bottom up that capitalization is starting to awaken a little bit.
04:37I'd also point out that we've had a little better activity in, you know, IPOs and some of that things, which is down on the cap spectrum as well.
04:46So there might be some good signs going on there because, in part, the money supply is starting to rise again.
04:53It was negative for so long, year on year, at a record setting like the time, that it's now back positive and still growing.
05:00And that could help that sector.
05:01I think there's a lot of values throughout that entire marketplace.
05:04I also like international stocks in general because we're already seeing if we drop rates and increase the U.S. money supply in the slower growing U.S. economy, that's going to bring the U.S. dollar down.
05:18It's already starting to occur.
05:20As the money growth has picked up, concerns about growth slowing a little bit has come down.
05:24You can see the dollar weakening, and that's alive in the international stock markets, which really they're doing about as well as some of the tech sectors here in the United States with dollar weakness.
05:35I think that's going to continue.
05:37The dollar is extraordinarily high.
05:39The start of this year, the real value of the Tradeway U.S. dollar index got to within a couple percentage points of its all-time record high in March of 1985.
05:51And you could argue that in the last decade, the dollar has gone up about 50% in real terms.
05:57That's one of our tightest dollar policies we've ever employed since the dollar began floating in the early 1970s.
06:04And it's killed international stocks more than anything.
06:08If the dollar now is starting to weaken, it could weaken a long ways just to get back to average, and that could do a lot for international stocks in general.
06:16And then lastly, I think value stocks, just in general, sort of looking at the perspective of lower PEs, stocks overall, probably more cyclically-based areas of the market, I think are attractive.
06:33Because I think because of our tight monetary policy overall, and because of our restricted dollar, and because of the chronic inverted yield curve or flat yield curve that we've had, and the chronic 7% mortgage rate in the economy, which is growing in 2% or less right now,
06:52I think that's just depressed, kind of the cyclical value parts of the stock market.
06:57If we do ease now for a period of time on a consistent basis, I think that could pick up a lot of that cyclical part of the market and some of those deep value plays.
07:06You know, it takes confidence to buy things that have been so out of favor for so long.
07:11And one of the things that is going to be necessary for value stocks to do better is we're going to have to lift consumer and business confidence in this country.
07:23And again, it's not the only thing holding it down, but I think one of the big things is just a long period of time with monetary tightening going on.
07:31And if we turn to easing, we start lifting the money supply, lowering yields, expand or steepen the yield curve, I think confidence about the future economy improves.
07:42And in that sort of situation, confidence on Main Street picks up, and that's the type of thing needed for investors to look at some beat up, but really attractively valued parts of the marketplace that people have ignored for a long time.
07:56Jim, do we see those sectors playing catch up at the expense of tech or in addition to tech?
08:04Do you think money will still flow into tech?
08:06And if not, does that amount to more muted market gains because the S&P 500 is so heavily weighted toward big tech?
08:14That's the big question and the great question, Caroline, because to me, that is still quite a bit of a question mark in my mind.
08:23But here's where I lean at the moment.
08:28I would not outright just sell tech.
08:31I don't think this is very likely anything like the dot-com top or anything remotely tech is going to not only underperform but collapse.
08:41I don't think that's what we're looking at.
08:43I don't think we're going to have a recession anytime soon.
08:47And so I think that tech will participate in any ongoing bull market.
08:52But I think it underperforms from here.
08:54I think these other areas with policy leverage that they get more benefit from than does technology stocks and the fact that they're so much more relatively undervalued are going to start to become more popular and favorite.
09:07And as a result, people will probably lead to allowing their tech weightings to decline or physically reduce them somewhat.
09:16Everyone probably is pretty highly within tech.
09:19And I think that's going to lead to some not wholesale selling like a panic, but I think
09:24it's going to lead to a slow lead of reducing those overweights in that area when they chronically sort of underperform.
09:33And, yeah, I think that the result of that is probably going to be that the S&P 500 probably does a little less average percentage gains from here compared to the broader marketplace.
09:46You know, if we've been doing 1012 in this bull market so far in the S&P, a big chunk of that's because the tech stocks, the mag sevens have been doing far better than that, offsetting weakness elsewhere.
09:59And going forward, I think we'll have positive but much less returns in technology relative to the broader stock market gains.
10:09And that means probably S&P 500 underperforms, you know, maybe the Wilshire or the Value Line, you know, overall index or particularly just some of these other sectors like small cap stocks for a while.
10:21So my feeling is I wouldn't panic and sell out, but I do think they're going to be the underperformers during the balance of this bull.
10:31And it's the reason, another reason I wouldn't sell out.
10:35It is because I'm sorry, but new era technology in this cycle in particular is unique and it's unprecedented.
10:46I don't think this is like the Industrial Revolution or the invention of fire or anything else.
10:52This is something different that chronic technological advances are being made going on and on.
10:57We've invented the automobile and it's still about the same today it was when it was invented.
11:02Okay, we invented the airplane.
11:05It still does about the same thing it did then.
11:07But technology, when it first came out with IBM in the 60s and we had a computer the size of a warehouse that did some calculation for NASA and others, that's totally different today.
11:21It continues to remake itself.
11:23So I think you want to own tech even when you don't think it's going to outperform because you never know when that brand new sizzling innovation is going to arrive and take over all the motion in the room.
11:38So I would go to an underweight position, but I wouldn't dismiss it.
11:41Okay, so Jim, bottom line, just quickly, if the S&P 500 is up, what, 7% or 8% so far this year?
11:49And if you expect tech to underperform from here, how much more is the S&P 500 gaining this year?
11:56I think it's going to do okay yet.
11:58I think it maybe goes up another, you know, 5% or 6% this year.
12:04I don't think it's going to be gangbusters.
12:06But I do think it's going to have closed out higher than it is today by another meaningful percent.
12:12But, again, I think the even bigger action here could be to get to the fall.
12:18We are in an easing program.
12:20The bigger action could be in these other sectors I mentioned that could yield some really decent double-digit type returns yet through year-end.
12:28We'll have to see.
12:29All right.
12:31Still double-digit gains, though.
12:32We'll take it, Jim Paulson, former chief investment strategist at Wells Fargo and author of Paulson Perspectives.
12:37Thank you so much.
12:39Thanks, Caroline.
12:40Very much for having me.
12:41I appreciate it.
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