Salient to Investors:

James Paulsen at Wells Capital Mgmt said job creation, tame inflation and rising home prices support solid retail spending in 2013, but consumer cyclicals may underperform the market because these positive economic trends are already discounted – the S&P 500 GICS Consumer Discretionary Sector Index has outperformed the broader market by 58 percent since 2008, the longest streak since 1990 but is overextended and trading at a 27 percent premium to the industrials versus a 20-year historical average of 13 percent.

Paulsen said the S&P 500 industrials offer better values, boosted by re-accelerating emerging-world economies. Paulsen said consumer discretionary stocks started outperforming the market in 2008, before retail spending began improving and prior to the stock market bottom in March 2009, a sign of the disconnect between Wall Street investing and Main Street activity.

Quincy Krosby at Prudential Financial said industrial companies have been beaten down amid debt concerns about Europe spreading and about slowing growth in China, but these economies appear to be stabilizing. Krosby said money managers can’t wait until everything is perfect to beat the market, and will focus on large-caps with international exposure like Caterpillar because they are a good barometer of the industry. Krosby said sector outperformance is born in the worst of times and dies in the best of times.

Eric Teal at First Citizens BancShares said investors will start rotating out of consumer discretionary stocks before any negative earnings results, and the fiscal deal may be a drag on the industry. Teal said the fiscal cliff is much more broad-based and can impact consumer spending at all different levels. Teal said industrials still need to demonstrate better earnings growth to merit an above market weighting.

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