Stable market returns indicate tough times ahead

Traders work on the floor of the New York Stock Exchange.

The current bull market in stocks has been one of the most stable advances of the past century, but that won\’t be good news for investors within the weeks in the future, says James Paulsen, chief investment strategist at Wells Capital Management, a business of Wells Fargo Asset Management.

“While this steady stock market action has improved investor sentiment, it\’s also probably worsened the near-term outlook for stocks,” Mr. Paulsen said inside a note to clients.

Based on his research, the U.S. stock exchange exhibited “no trend” and was “exceedingly volatile” between 2005 and 2008, but steadily rose?with “remarkably low volatility” in the past three years.

Unfortunately, he added, this highly predictable rally implies investor sentiment is at one of its highest levels since 1900.

“When it has been up to it is today, the U.S. stock market has historically declined in the coming year over fifty percent the time, suffering a median percent decline in the next 12 months of approximately 1.5%,” he explained.

Mr. Paulsen’s advice to investors would be to stay overweight equities, but to maneuver towards international stock markets and away from U.S. equities he expects will suffer a correction sometime soon.

“Most international markets have underperformed U.S. stocks in the last few years and currently offer more appealing relative valuations,” he explained.

“Moreover, investors can diversify away from increasingly hostile U.S. policy officials toward hospitable policies for the foreseeable future in both the eurozone as well as in Japan.”

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