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Confidence Is Back! Where to Invest Now

Alex Dumortier, CFA
August 14, 2013

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

U.S. stocks have edged lower this morning, with the S&P 500 (INDEX: ^GSPC) and the narrower, price-weighted Dow Jones Industrial Average (INDEX: ^DJI) down a modest 0.04% and 0.2%, respectively, as of 10:05 a.m. EDT.

The return of confidence
Yesterday, I asked whether confidence was enough to fuel the next leg of the rally. I was highlighting (and demolishing) a highly suspect argument from Wells Capital Management's James Paulsen, according to which we are entering the "valuation cycle" of the bull market, during which "earnings performance flattens while the stock market surges." While confidence may be necessary to the bull case in stocks, as Mr. Paulsen asserts, I'm not sure it's sufficient. Still, the good news is that confidence is indeed improving.

Some of the most striking evidence for this shift in sentiment is found in the Bank of America Merrill Lynch Fund Manager survey for August, which was published yesterday. For example, a net 72% of respondents now expect the global economy to pick up over the next 12 months -- the strongest reading in almost four years and a tremendous improvement from July's net 52%.

The change in sentiment regarding Europe is even more impressive, with nearly nine out of 10 (88%) European fund-managers expecting the eurozone to strengthen in the year ahead -- twice the