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00:00You've got a year end price Tom Keene on the S & P 5000 I'm trying to work out if that's this week or next year. Which ones you it's it's next year. I really think Java we're going to have a very volatile year ahead of us. I think we're going to end up you know largely not not near as much as we've been used to of late. But I would argue that it's probably going to be the best in the first half of the year. I know we're up here. A lot of people think we might give some of this back as we enter the new year. That could happen. But I think we're going to maybe go above 5000 during the first half of the year on excitement that finally maybe moving the Covid from pandemic to an epidemic. And on the realization I think increasingly that inflation is moderating. But then I think in the last half I think we're going to see bond yields come up and and the Fed taper tapering and maybe and raising rates more aggressively. I think we could have a bit of a struggle in the latter half of the year. That's why I think we'll end up around 5000 for the S & P. But I think the broader market outside of the S & P 500 does better this coming year than the S & P 500 overall. Well let's talk about the bond yields going up because I know you see the tenure at 225 at year end next year obviously by about 75 basis points south of that at the moment. Does it matter the ultimate rate how high the rates ultimately go or the speed at which they get there. Do you think that is a move that will happen quickly and that that is actually what will be upsetting to the equity market. Great question Kelly. You know one of the things that I've looked at recently look back to 1926 and looked at all the months that we've been under a 3 percent 10 year yield. And I got to tell you when you're under 3 percent tenure historically we've only been there about 25 percent of the time. It is a gift to equity investors because the stock market what it does is almost 21 percent annualized annualized monthly returns and it has negative monthly returns a third of the third less compared to when you're above 3 percent. The return when you're above 3 percent is 10 percent. What is 21 percent below. So one of the things I think is important for investors to focus on is rates are going to go up. But boy I'll tell you to get back above the 3 percent level the history of the stock market is awful encouraging for stock investors. That doesn't mean that a rate rise of 75 or 100 basis points over a short period time won't bring a correction. I think we might we will get that later this later next year. But I think it's important to realize not to totally run away from stocks at least until we get back above 3 percent tenure. Well is there no alternative. Jan I mean is that part of the thesis. Or do you see other places to go especially to hide from inflation. You know Matt I I I could be wrong but I really think inflation is going to moderate. I think there's already some favorable signs. Commodity prices have kind of flattened out since May break. Even rates have flattened out since May. And I think what I'm most encouraged by is that policy both monetary and fiscal have been tightening really since March. The M2 money growth annual growth was 27 percent year on year in March. It's now 13. Fed's balance sheet was growing at 80 percent in March year on year and it's now under 20 percent. So there's been a good degree of monetary at least less stimulus if you will. Fiscal deficit was 19 percent of GDP earlier this year. It's now under 12 percent. So there's also been fiscal tightening if you will. And I think that policy leads inflation historically anywhere from 12 to 18 months. And that those tightening moves since since really the end of the first quarter I think come into play next year and moderating inflationary force. So with the commodity prices which are the leading edge of inflation pressure already showing a rollover and policy behind that now moderating I think we're going to be I think it's going to be a good outcome for inflation. I don't think it's going to return to the 2 percent Fed target. In fact I think it's going to stay elevated around 3 percent of the balance of this recovery. But I do think it's going to moderate next year and that's going to calm fears of runaway inflation. Jim you just said something really really interesting. You used the word timing but then you said that the equity market wouldn't get hit until 10 year yields got to say 3 percent. Now I'm kind of way through this with you now Jim. So bear with me a second. Are you saying that we can get inflation down with a set of reserves doing what it's doing without actually seeing tied to financial conditions. I expect bond yields will will move up. Well as I said to two and a quarter percent next year primarily because I think economic growth is going to continue to be to to be strong. I also think a realization is going to hit us next year. Jonathan that we're not returning to the Fed's 2 percent inflation target. I think the Fed may even adopt the 3 percent as OK as an inflation target or they'll move their inflation target up. And I think the bond market is going to respond to that as the year progresses interest. I also expect the Fed to raise the Fed funds rate over the year. I do think that will bring a correction but a correction that's buyable in my view because I think the market will recover from it and move on to new highs. And I really think that the earnings and fundamentals of the economy are going to remain very very strong. That is going to continue to drive this equity market.

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Leuthold's Paulsen Sees S&P 500 Rising Above 5,000 in 2022

Jim Paulsen, Leuthold Weeden Capital Management’s chief investment strategist, discusses the factors behind his bullish call for the S&P 500 index on "Bloomberg Surveillance." (Source: Bloomberg)

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