Investors should shrug off the recent market declines and continuing limp economic recovery as temporary dips and wobbles, tilting their allocations to U.S. equities, investment strategists say.
“No economic expansion or market run is ever a straight line,” said James Paulsen, chief investment strategist, Wells Capital Management Inc., Minneapolis. “I think we have a recovery going on.”
“Most of the factors that led to the slowdown have reversed,” Mr. Paulsen said, citing bad weather that slowed construction and consumer demand, the March earthquake and tsunami that disrupted Japan production, as well as rising Treasury bond rates and energy prices.
The 10-year Treasury yield, for instance, has been falling steadily from the 3.75% high for this year on Feb. 8, Mr. Paulsen noted. The yield fell to 2.87% at the close on June 24.
“These were things that caused the economy to slow down,” Mr. Paulsen said. “All those things that were a wind at the front of the boat now are a wind at the back of the boat.”
“My view is this is a pause in an ongoing recovery,” Mr. Paulsen said. “I would take care to use this soft patch as an opportunity for buying.”
Mr. Paulsen thinks the Standard & Poor's 500 stock index will reach 1,450 by the end of the year, giving it a 14.3% price appreciation for the year. The index closed at 1,268.44 June 24. Mr. Paulsen didn't have a total return forecast for the S&P 500, which closed Dec. 31 at 1,257.64.
Jim McDonald, senior vice president and chief investment strategist, Northern Trust Co., Chicago, also expressed optimism. “We see a soft patch in the economy,” Mr. McDonald said. “We don't think we are going into a recession and don't think you should be selling stocks.” Corporate earnings have been good despite the slowdown, Mr. McDonald noted.
In its tactical allocation recommendation, Northern overweights U.S. equities by seven points to 24%, while underweighting other developed markets equities by three points to 8% and staying neutral on emerging markets at 5%.