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- Stocks' next bullish driver could come from improved confidence on Main Street, James Paulsen, chief investment strategist at The Leuthold Group, said.
- Vaccine distribution and fresh stimulus stand to lift spirits among everyday Americans in the coming months.
- History shows that broad market strategies outperform the S&P 500 when sentiment improves, Paulsen said.
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The stock market's next leg up will have more to do with Main Street optimism than Wall Street bullishness, according to James Paulsen, the chief investment strategist at The Leuthold Group.
Stocks wavered near all-time highs to close out the week as investors weighed stretched valuations against hopes for economic recovery. The surge to fresh records has led some to grow increasingly worried that a market correction will come later in the year as investor bullishness reaches a fever pitch.
A brief decline is likely "healthy" for the new bull market, but stocks could first see a new boon from everyday Americans, Paulsen said in a note to clients. Consumer confidence remains well below levels seen before the pandemic amid continued lockdowns and economic pain. Vaccine distribution, fresh stimulus, and gradual reopening can serve as a boost for sentiments and the stock market's rally, the strategist said.
The Leuthold Group
Much of the market's climb out of virus-induced lows was led by tech giants and growth stocks. Vaccine developments and new fiscal support kicked off a rotation to value and small-cap stocks, but the market's leadership remains relatively narrow.
History shows improving sentiments can change that and fuel a broader market upswing, Paulsen said. In previous months when consumer confidence increased, the broad market outperformed the S&P 500 by 3%, with value and small-cap names rising the most. Conversely, broad plays underperformed the benchmark index by 2.3% on average when confidence declined.
Additionally, broad market strategies outperformed 56% of the time that confidence improved, according to Paulsen. In months when sentiments worsened, such plays only outperformed about 41% of the time.
Concerns around lasting labor-market pain and new COVID-19 strains recently cut into some of the market's rotation to value stocks and moved cash back into momentum plays. Should consumer confidence improve, widening of the market's leadership should lift stocks to new highs, Paulsen said.
"Any additional revival of Main Street sentiment should be a shot in the arm for broader stock market plays," he added.
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