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A trader gives a thumbs up while he works on the floor of the New York Stock Exchange February 3, 2014.BRENDAN MCDERMID/Reuters

No wonder stocks encountered a difficult start to the year: They were in a "lose-lose" position, according to Michael Hartnett, chief investment strategist at Bank of America.

As he explained in a note, "If economic growth surprised to the upside, then so would interest rates, putting stocks at risk; if growth disappointed, then investors would rightly question what global stocks were doing trading above 17 times earnings."

It sounds like the argument of a bearish strategist who can't possibly see an ongoing bull market.

Curiously, though, Mr. Hartnett started the year with a bullish outlook – and the dip in January merely bolstered his view that stocks are the assets of choice for investors in 2014.

Yes, some of the recent news is alarming. Several U.S. economic indicators have implied that the momentum in the second half of 2013 is now dying. European inflation is nearing deflationary territory. And what's going on in emerging markets, where bond yields are up and currencies are falling, looks to him like a long-term bear market there.

But there is an upside: Greed has vanished, setting up better conditions for those with fortitude.

"Investors have capitulated out of stocks and raced back to the perceived safety of bonds," he said, pointing to the $12-billion (U.S.) that flowed into U.S. government bond funds last week and the $34-billion that flowed out of equity funds.

Okay, "capitulation" is a stretch given that the S&P 500 fell all of 5 per cent in January. Mr. Hartnett agrees that more bearishness would set conditions for an "optimal entry point."

Even so, current conditions should provide an upside to stocks, and Thursday provided some indication of what can happen when sentiment rebounds: The S&P 500 rose 1.2 per cent, for its biggest one-day surge of the year, following a better-than-expected reading on weekly jobless claims.

But Mr. Hartnett also remains convinced that the U.S. economy is headed in the right direction.

In particular, he noted that Bank of America mortgage applications surged 54 per cent in January, year-over-year, providing more evidence of a housing market recovery.

"Indeed, all the key catalysts for U.S. 'escape velocity' – real estate, banks and small businesses – are quietly improving," he said. "U.S. real estate prices are up more than 20 per cent from their lows, bank lending to small businesses is expanding for the first time since 2008 and small business capital expenditure plans are on the up."

Needless to say, he is more enthusiastic about U.S. stocks over, say, European stocks and emerging markets.

For individual names, he recommends giving a closer look to what he calls the "fallen angels" – companies with strong management, earnings growth and balance sheets as well as margin growth potential – that have nonetheless slumped with recent market turmoil.

U.S. stocks include Regeneron Pharmaceuticals Inc., Adobe Systems Inc., LinkedIn Corp., Credicorp Ltd., National Oilwell Varco Inc., Precision Castparts Corp. and FedEx Corp.

"In our view, a strategy of holding companies that offer both high quality and high growth will continue to outperform, even as macro, rates and growth normalize into 2014," he said.

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