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"Investors don't have a lot of conviction about the rally," he says. "Most don't believe the Europeans have solved their problems or that the slowdown in China won't get worse." Or apparently that the U.S. economy will grow much faster. The big news so far this year is that unemployment in the U.S. fell to 8.5 percent in December, the lowest in almost three years. That raised hopes that the labor market is finally on the mend. But then the government reported Thursday that unemployment claims rose to 399,000 in the first week of the year, the highest in six weeks, and now investors are not so sure. Further dampening spirits was a report that sales at retailers increased just 0.1 percent in December. Earlier, several retail chains, including Target, J.C. Penney Corp. and Kohl's Department Stores Inc., cut their earnings forecasts. After Tiffany & Co. warned of disappointing holiday sales, investors pushed its stock down 11 percent. Among S&P 500 companies making so-called pre-announcements about their fourth quarter earnings, FactSet says those cutting forecasts have outnumbered those raising them by three to one. Which would be bad for stocks -- except in the upside-down world of investing. Linda Duessel, an equity market strategist at Federated Investors, says investors tend to drive down stocks too far on warnings that profits could fall short of expectations, creating bargains. "We're betting investors will be surprised," Duessel says. "We're bullish."
So is Paulsen of Wells Fargo, notwithstanding his talk of an eerie calm. He says investors are paying 12.5 times expected per-share earnings for the S&P 500 versus a more typical 14.5 times, meaning they're relatively cheap. He thinks the gap will close, and stocks could jump 15 percent, assuming the unemployment rate continues to drop this year and investors become more confident. For an extra kick in your portfolio, he suggests buying stocks in industries closely tied to the economy, like industrials, materials and financials. All three fell last year. "There's a huge discount (on stocks) due to all the fear and phobia," Paulsen says. "Rising confidence could be a big boost."
[Associated
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