US Markets

Market rally should continue for a good part of 2017, strategist Paulsen says

Sell your winners or ride the rally?

While some may be wondering if they should sell the winners of the market rally, strategist Jim Paulsen is betting that the good times will keep going — at least through a better part of next year.

Therefore, he would stay risk-on in things like cyclicals, small caps and international stocks for now.

"We might continue to be driven by a renewal of optimism … which has been brought on from a lot of different forces, including reacceleration of U.S. and global growth, reacceleration of earnings, moving the world away from zero interest rates, normalizing monetary policy and a pro-business new administration," the chief investment strategist at Wells Capital Management said in an interview with "Power Lunch."

The market has been on a tear higher since President-elect Donald Trump's victory on Nov. 8, with the Dow Jones industrial average now within striking distance of 20,000.

Jack Ablin, chief investment officer at BMO Private Bank, called it a "hope environment" in which investors are "not letting facts get in the way of the rally."

That said, he suggests that anyone who wants to cash in perhaps wait until next year. That's because while Trump has proposed keeping the capital gains tax at 20 percent, House Speaker Paul Ryan is calling for the tax to go to 15 percent, Ablin noted.

"At worst it is the same, you push it into next year and perhaps rotate into something that's cheap that could benefit once Q4 earnings come out and that would be European large caps, even the Japanese large caps, that would benefit from a weaker currency and a boost in export growth," he told "Power Lunch."

Meanwhile, Paulsen isn't necessarily predicting clear sailing through the end of the year.

He believes there may be a correction at some point thanks to higher yields and elevated inflation. However, it would occur at a higher level than where the market is now, perhaps when the reaches about 2,500, Paulsen noted. He thinks the S&P may end 2017 at around 2,350.

He's also predicting a surprise move in the U.S. dollar, which has also been gaining strength since the election. He believes that if the Federal Reserve raises rates next year it will be because of rising inflation and that is "a major destructive force" for the greenback.

"As we go into next year we're going to find out the Fed is behind the curve, and wage inflation and consumer price inflation, even commodities are doing fairly well and I think the dollar is going to trade off on that," Paulsen said. "That could create a lot of portfolio readjustment because there are very few players expecting it."

However, Ablin said it is real rates that determine currency prices, not the fed funds rates, and there has been a "global slush of capital" in the markets.

"I could see a flow of currency back into U.S. dollar assets as our interest rates are incrementally more attractive. That could, actually, keep the dollar higher than we want and could stymie some of our growth plans," he said.

Those plans include a bet on emerging markets, noted Ablin.

— CNBC's Brenda Hentschel contributed to this report.