One On One With James Paulsen, Chief Investment Strategist at Wells Capital Management
Tuesday, February 21, 2006
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SUSIE GHARIB: Our guest tonight says despite investor angst about the markets, there are lots of positives. Joining us now, James Paulsen, chief investment strategist at Wells Capital Management. Hi, Jim.
JAMES PAULSEN, WELLS CAPITAL MANAGEMENT: Hi, Susie.
GHARIB: Well, one of the things that was giving investors angst today was these Fed minutes that were released from the January meeting. And a lot of concerns that there are more rate hikes coming even though we`ve been hearing about this for a while. What`s your analysis on that?
PAULSEN: Well, I think the Fed will continue to keep rising interest rates this year. I`m less inclined to believe that they`re going to be done after one or two more. They might still be doing more after that, but I don`t know if it scares me so much because for the last 18 months, the Fed`s been raising rates rather regularly by 3.5 percent, 14 separate hikes and the stock market over that time has probably gone up about 11 or 12 percent.
GHARIB: Well, you`re saying there`s a lot of positives out there but the things that investors are focusing on are negatives and today, for example, there was a lot of talk about the inverted yield curve that the two-year note, the five-year notes have higher yields on them than longer term like the 10-year. And all the implications of what an inverted yield curve means for the economy and for the markets. So what`s your take on something like that?
PAULSEN: Well, I think, Susie, I kind of agree with Chairman Bernanke who recently said that he didn`t think the yield curve being inverted, slightly inverted, would shut the economy down much. Indeed, the predictive ability of the flat yield curve back in the 1970s was very strong. When it went flat or inverted, you typically had a major slowdown or recession. But really since 1990, the predictive ability of a flat or inverted yield curve has been not that great. And I think in this instance it`s not likely to slow the economy much itself. And then in relation to other stimulative policies like still $400 billion plus fiscal stimulus, still very low long-term interest rates, a lot of excess liquidity around, I think all in all, that the yield curve is not likely to slow us down very much.
GHARIB: All right. So then what is your stock investing strategy given this viewpoint that you have about the markets and the economy?
PAULSEN: Well, I think when we started this year, Susie, much of Wall Street was focused on the idea that Fed tightening would slow the economy and therefore you kind of want to -- as soon as the Fed would quit, the stock market would take off and you should be in large cap defensive unit growth companies that do well if the economy slows. I think what`s happened this year is almost the opposite. The economy has proved stronger rather than weaker. It looks like the Fed is not done rather than near done. And what`s happening is the stocks have gone up a little bit but it`s being led by small cap companies and by cyclical companies. And I think that`s where I would continue to overweight for this year. Smaller capitalization companies those companies more economically sensitive. Then I`d also have an over weight in international markets.
GHARIB: Why international markets?
PAULSEN: Well, I think a couple things. I think the leadership of this global recovery is not the U.S. and it`s not G-7 countries; it`s really the developing countries. It`s China, India, Mexico and elsewhere. And I think that those countries are going to continue to lead this global recovery and an overweight in the emerging markets makes a lot of sense. And secondly, I think that the dollar exchange rate is early in what might prove to be a multiple year weakening period, primarily against developing currencies and so I think that benefits international investments.
GHARIB: We`re going to have leave it there. Jim, thanks so much for coming to town and talking to us.
PAULSEN: You bet, Susie, thank you.
GHARIB: We`ve been speaking with James Paulsen, chief investment strategist as Wells Capital Management.
