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Paulsen's Perspective

Jan 22 2019

Policy Paralysis

  • Jan 22, 2019

The next recession, whenever it is, could face an unusual headwind. Normally, recessions are about liquidating fundamental excesses. Restoring health to balance sheets which were abused in the last expansion, purging bad business decisions, restoring liquidity, replenishing savings, and restarting the profit, job, and income creation cycles. 

Jan 16 2019

A Recovery Refresh?

  • Jan 16, 2019

In 2018, the U.S. recovery was on a path toward recession. It couldn’t last much longer growing above 3% in real terms and 5.5% in nominal terms, with an unemployment rate below 4%. Wages, consumer, producer, and commodity prices were rising and the Federal Reserve (Fed) and bond vigilantes were tightening.

Jan 08 2019

A Few Encouraging Signs...

  • Jan 8, 2019

Amongst the carnage and ongoing financial market volatility are a few encouraging signs the stock market may eventually regain its footing. As the pictures below illustrate, a proprietary U.S. economic momentum indicator suggests that recession fears may lessen by the spring, valuations have now fallen well below levels justified by bond yields, investor mindsets are quickly shifting away from overheat fears, and the U.S. dollar may finally be breaking down.

Jan 03 2019

Some 2019 Market Musings?

  • Jan 3, 2019

Welcome to 2019! As we begin the New Year, volatility (the stock market’s VIX volatility index spiked above 30 last week) and uncertainty (Bear Market, Recession?) reign. Amongst all the chaos, and with much personal trepidation over what may actually happen this year, here are some observations and a few guesses for 2019.

Dec 20 2018

Do Emerging Market Stocks Play Offense And Defense?

  • Dec 20, 2018

Emerging Markets (EM) are not normally considered a safe place to hide during severe stock market corrections—but they have been in the latest equities swoon. As shown in Chart 1, while the S&P 500 composite stock price index has declined by more than 14% from its high on September 20th, the MSCI Emerging Market stock price index has only declined by about 7%. 

Dec 17 2018

Stag, Flation, Or Both?

  • Dec 17, 2018

Stagflation is normally considered an economic condition characterized by weak real growth accompanied by rising inflation. Today, however, this condition may be most noticeable in the mindset of equity investors. 

Dec 06 2018

Problems Aplenty

  • Dec 6, 2018

Recently, when Federal Reserve Chairman Jerome Powell and President Donald Trump both blinked—one on rate hikes and the other on trade wars—the S&P 500 surged by more than 6% in about a week! Many sensed the primary challenges holding back stocks were finally resolving and sentiment quickly turned bullish as investors did not want to miss the Santa Rally! 

Dec 03 2018

P/E Pressures

  • Dec 3, 2018

The valuation of the stock market has been under steady pressure this year. The S&P 500 trailing price-earnings (P/E) multiple has declined by about 25% from a recovery peak of 23 in January to about 18. The hope for this bull market is that P/E contraction is almost over, allowing stock prices to again rise with earnings gains. 

Nov 20 2018

Popular/Panned (PP) Ratio — An Update

  • Nov 20, 2018

We first published the accompanying chart in March of this year. The PP Ratio had just spiked sharply upward in the previous three months, as it did near the end of the dot-com era in 2000. Since March, in a very similar fashion as shown, the PP Ratio has eerily traced the same path as during the dot-com era.

Nov 19 2018

Velocity Quietly Rises?

  • Nov 19, 2018

he velocity of the money supply measures the pace at which cash is spent in the economy, or the amount of total GDP activity created by each dollar of the money supply. Monetary velocity has long been a focal point for the Federal Reserve, economists, and investors because its growth often shapes the character of the recovery.

Nov 12 2018

“Trending” To “Timing”

  • Nov 12, 2018

From the mid-1920s until the mid-2000s, the performance cycles of small cap stocks relative to large cap stocks (i.e., the small/large market cap factor or SLF) were typically multi-year events.

Nov 05 2018

A Fundamentals Farewell…

  • Nov 5, 2018

Solid economic growth and fabulous profit results have underpinned the stock market in the last couple years. Since the presidential election, the global economic recovery exhibited a rare synchronization for a time, and within the U.S., confidence measures rose from mediocre to near post-war highs...

Nov 02 2018

Are Wages Now On the 4% Freeway?

  • Nov 2, 2018

The accompanying chart illustrates the annual rate of wage inflation for all U.S. nonsupervisory private nonfarm payrolls. This was the primary wage series used by the Bureau of Labor (BLS) until 2006 when it began using a wage series based on all private sector workers.

Oct 29 2018

“Crowding-Out” Productivity?

  • Oct 29, 2018

Productivity has been weaker in the contemporary recovery than any other in the post-war era. At just a little above 1% per annum, the pace of productivity growth in this recovery has only been about 40% of the average growth experienced during past periods of economic expansion! 

Oct 25 2018

VIX Volatility Vignettes!

  • Oct 25, 2018

Amongst a week of elevated financial market volatility, a few random short vignettes on recent action.

Oct 22 2018

It Only Takes A Little Inflation…

  • Oct 22, 2018

U.S. inflation has been modest for the last 35 years. The annual rate of core consumer price inflation has only briefly been above 5% since 1983, and for the last 20 years has been below 3%! Since inflation has been low for so long, an entire generation of investors often consider it a nonevent. 

Oct 17 2018

A Positive Sign For Emerging Market Stocks?

  • Oct 17, 2018

A central quandary for equity investors is whether Emerging Markets (EM) represent an opportunity or a risk? Current relative valuations highlight the opportunity. The relative forward P/E multiple (versus the S&P 500) is as low today as it was at the start of this bull market in early 2009, and relative price-to-sales and price-to-book ratios have not been this attractive since the early 2000s!

Oct 15 2018

The ‘REAL’ Killer!

  • Oct 15, 2018

Bond yields have taken center stage in the financial markets. Overheat anxieties have awakened, the Federal Reserve is poised for its fourth Fed funds hike of the year in December, and the 10-year bond yield has risen by about 40 basis points in a little over a month!

Oct 08 2018

Another Overheat Round?

  • Oct 8, 2018

Inflation has remained low throughout this recovery causing many investors to conclude it is not much of a problem even if it rises a bit further. However, inflation has been trending higher for much of the last four years and has already significantly impacted the stock market. Moreover, because both wage and price inflation recently reached new recovery highs, overheat pressure seems poised to become even more pronounced. 

Oct 01 2018

It’s Too Calm & Boring!

  • Oct 1, 2018

Even though the calendar has turned to fall, it sure seems like the Dog Days of Summer have persisted. Volatility across the Financial Markets has been remarkably modest in the last year. It’s not just a low VIX volatility reading in the stock market, but rather, weekly volatility in the stock,

Sep 24 2018

Defensive Stocks… The Canary In The Coalmine?

  • Sep 24, 2018

Despite a very strong economy, defensive stocks have been matching the performance of the overall stock market since early this year. Indeed, in the last three months, while the S&P 500 has returned to a new record high, the top four leading S&P 500 sectors have been those normally considered defensive (i.e., Health Care, Telecom, Utilities, and Consumer Staples), and the five sectors which have trailed the S&P 500 are much more cyclical (Consumer Discretionary, Technology, Financials, Materials, and Energy). 

Sep 17 2018

A Valuation Pictorial

  • Sep 17, 2018

Everyone has a favorite stock market valuation tool. For some, it’s the celebrated Shiller CAPE P/E (price/earnings) ratio. Many prefer to value stocks based on expected future earnings or the forward P/E multiple. Others are more comforted by a “show-me-the-money” approach basing the P/E multiple on (actual) trailing earnings.

Sep 10 2018

This Could Yield Some Gas?

  • Sep 10, 2018

Confidence has arguably played an outsized role in the contemporary bull market. It was born amidst widespread fears of the “second coming of the Great Depression,” and until recently, had persevered despite lingering crisis fears and confidence measures which remained below post-war norms. 

Sep 04 2018

A ‘Fantastic Fundamentals’ Fade?

  • Sep 4, 2018

Fantastic Fundamentals have pacified the White House, the Federal Reserve, and investors during the last couple years. Is this about the end? 

Aug 27 2018

Stock Market Nears FULL Capacity!

  • Aug 27, 2018

The potential for the stock market to rise depends on how much capacity there is for improvement. Can its valuation rise? Could investor confidence improve? Do corporate profits still have room to run? Will stocks become more competitive relative to alternative investments? How spent is the economic recovery?

Aug 20 2018

This And That…

  • Aug 20, 2018

Potpourri week! No common thread, just a bunch of unrelated thoughts. None are earth shattering, but hopefully each may prove marginally intriguing? So, sit back, grab a refreshing adult beverage, and let your mind wander about a bit…

Aug 13 2018

A BAD Tech Trend!

  • Aug 13, 2018

Technology stocks have outpaced the overall market during the last five years, and by an accelerating margin since the end of 2016. Naturally, they have become market darlings, replete with stories about remarkably innovative products with phenomenal growth potential.

Aug 06 2018

Correlation-Adjusted Valuation

  • Aug 6, 2018

The S&P 500 trailing Price-Earnings (P/E) multiple is currently higher than 84% of the time since 1950. Appropriately, high valuations have become a concern for many investors. Although the market’s high P/E profile has reduced future return potential, at least historically, it does not necessarily suggest significant downside risk.

Jul 31 2018

A Wage Whoosh!

  • Jul 31, 2018

As it often does, Friday’s jobs report will likely set the tone for the financial markets during the next few weeks. Since the January report, the employment numbers have been reassuring. A rise in the labor force has allowed solid job gains to coincide with a flattening in the unemployment rate near 4%, leaving an impression the labor market still has significant slack. 

Jul 30 2018

Dollar DRIVES The Day?

  • Jul 30, 2018

In the last few years, movements in the U.S. dollar have played a huge role in shaping the character of the recovery and the behavior of the financial markets. During the first half of this recovery, the trade-weighted U.S. dollar index (DXY) remained in a narrow range, but since 2014, its volatility has substantially increased.

Jul 26 2018

Popular/Panned (PP) Ratio - An Update

  • Jul 26, 2018

We first published the accompanying chart in March of this year. The PP ratio had just spiked sharply upward in the previous three months, as it did near the end of the dot-com era in 2000. Since, as shown, the PP ratio has been largely marking time during the last four months even though technology certainly has not lost its popularity.

Jul 23 2018

Let’s Get Real!

  • Jul 23, 2018

On a trailing earnings basis, the S&P 500 has been highly-priced above a 20x PE multiple (or below a 5% earnings yield) for most of the last two years. What does this suggest about future return potential, and perhaps more importantly, about the potential for negative returns? Although the absolute valuation of the stock market does impact future return potential, it has not been particularly useful in assessing the chance of losing money in the stock market. 

Jul 16 2018

Don’t FADE Inflation Risk!

  • Jul 16, 2018

Inflation/overheat worries have eased recently. The advance in the 10-year bond yield has stalled just below 3%, the upward trend in commodity prices paused once the U.S. dollar began rising in April, and wage inflation has failed to break above 3%. Indeed, the latest employment report left a goldilocks impression with a solid jobs gain, a rise in the labor force participation rate, and only a modest increase in wages. 

Jul 09 2018

The 2% Credit Spread Recession-Risk Toggle?

  • Jul 9, 2018

Most traditional recession indicators remain uneventful. The recovery is old by calendar standards, the unemployment rate is low, and the Federal Reserve has begun to tighten monetary policy. 

Jul 02 2018

Main Street Speaks To Future Returns

  • Jul 2, 2018

The contemporary character of the Main Street economy has often been a harbinger of future investment returns. Specifically, the mindset of private economic players (i.e., are they confident enough to engage in aggressive behavior or are worries dominating economic decisions) and the degree of resource slack (the unemployment rate) have often provided a good indication of how the financial markets may perform during the next five years! 

Jun 27 2018

Too Quiet... Too Long???

  • Jun 27, 2018

Considering how this bull market began, while it may not be widely recognized, it has simply been too quiet now for too long. The accompanying chart illustrates that the last eight years have been among the four calmest and quietest of all stock markets during the post-war era!

Jun 25 2018

Momentum Is Synonymous With Technology!

  • Jun 25, 2018

Another interesting echo, today, of the 1990s’ dot-com era, is how much the S&P 500 Technology sector has come to dominate price momentum (MOM) within the stock market. Like the late 1990s, stock market winners have become synonymous with technology. 

Jun 18 2018

Defensiveness Has Left The Building!

  • Jun 18, 2018

Perhaps the stock market is taking its cue from the NBA back-to-back champion, Golden State Warriors (and winners of three of the last four titles). They employ an aggressive and entertaining “Offense-First” style of play driven by multiple all-stars firing “threes” with rapid abandonment from distances normally reserved for long touchdown passes!

Jun 08 2018

Dot-Com Déjà Vu?

  • Jun 8, 2018

Haven’t we seen this movie before? Technology takes over the stock market late in a recovery cycle, seemingly making the bull ageless, pushing portfolios toward a more concentrated new-era exposure, stimulating investor greed bolstered daily by watching a chosen few (FANGs) rise to new heights, and convincing many that tech is really a defensive investment against late-cycle pressures which trouble other investments. 

Jun 08 2018

A Growth Alert?

  • Jun 8, 2018

This year started with strong expectations for economic growth. A substantial tax cut and evidence the global recovery had finally synchronized significantly raised expectations for both the pace of economic growth and corporate earnings results..