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Paulsen's Perspective

May 20 2019

Say Hi To Goldie?

  • May 20, 2019

Despite the current trade war with China, the U.S. economy has taken on an air of ‘Goldilocks’ since the December stock market swoon. Real economic growth has slowed, and both inflation and interest rates have moderated. The pace of growth is no longer too hot—as it was last year—nor has it yet become too cold—as most feared earlier this year. 

May 13 2019

The Fed Hit The Pause Button But Investors Pressed ‘Replay’

  • May 13, 2019

After the December stock market swoon, amidst escalating recession fears, the Federal Reserve hit the pause button on interest rate hikes. Investors, though, had a déjà vu moment, sensing the 2018 experience as reminiscent of a few years earlier and, considering the aftermath of the prior occurrence turned out to be profitable, investors in 2019 opted to hit the replay button! 
 

May 06 2019

Is U.S. Expansion Old Or Just Middle-Aged?

  • May 6, 2019

An aging economic expansion can be hazardous for investors. It tends to develop vulnerabilities (e.g., indebtedness, a lack of savings, over-indulgences, etc.) which threaten a premature ending. Often, old recoveries develop a capacity shortage leading to worsening inflation, interest rate pressures, and restrictive economic policies.

Apr 29 2019

Relationship Problems?

  • Apr 29, 2019

Investors have struggled this year with the relationship between stocks and bonds. The stock market seems very optimistic about the future, whereas bonds appear much more reserved, if not frightened, by the outlook. Should investors be concerned by the seeming contentiousness between stocks and bonds? 

Apr 26 2019

Trade And Fiscal Juice?

  • Apr 26, 2019

This morning’s U.S. GDP report should help calm fears about a pending recession and perhaps set the stage for a surprising acceleration in economic growth? Fears of recession have caused the Federal Reserve to pause its tightening campaign, slightly boost the pace of money supply growth, and significantly lower long-term yields. Improved monetary accommodation definitely raises future economic growth prospects.

Apr 22 2019

‘Wall Of Worry’ Taller Than Trump’s Border Wall!

  • Apr 22, 2019

Compared to post-war norms, the contemporary economic expansion has been odd in many ways. Persistent sub-par economic growth, a lack of normal lending and borrowing activities, declining labor-force participation rates, a stubbornly high underemployment rate, an inflation no-show, negative yields, and bizarre economic policies (e.g., TARP, cash for clunkers, stress tests, and quantitative easing). 
 

Apr 18 2019

Cyclicality is Scarce?

  • Apr 18, 2019

Better economic reports in the U.S. and about the globe are slowly reducing imminent recession worries. For example, today’s favorable reports on U.S. retail sales, unemployment claims, and the Leading Economic Indicator reinforces the likelihood the expansion perseveres. 

Apr 15 2019

Exposed To ‘Margin’ Investments?

  • Apr 15, 2019

U.S. profit margins have widened significantly in the last couple decades. Total U.S. corporate profits as a percent of GDP averaged only about 8% in the 20 years leading up to 2000, but has since risen by almost 30%, averaging 10.5%. Similarly, the overall profit margin among S&P 500 companies has increased steadily in this recovery to record highs! 

Apr 08 2019

Embrace Your New Sugar Daddy!

  • Apr 8, 2019

Many believe the contemporary bull market has been nothing more than a Sugar High produced by massive and unprecedented monetary easing. In the last couple years, however, the Federal Reserve has raised interest rates and allowed its balance sheet to run off, weaning the markets from its sugar. 
 

Apr 02 2019

A Rally With Fundamental Foundations?

  • Apr 2, 2019

A legitimate concern facing investors is how quickly, and how much, the stock market has recovered while economic and earnings fundamentals have deteriorated. Without improving fundamentals, this rally appears overdone—based on hope—and increasingly suspect.

Mar 28 2019

Has The Yield Curve Been TRUMPed?

  • Mar 28, 2019

The U.S. yield curve has inverted (at least the 10-year Treasury yield to either the 3-month T-bill or the Fed funds rate) and captured the full attention of investors. Rightly so, since a yield curve inversion has historically been an excellent indicator of a pending recession. However, a condition that has always existed in the post-war era when the yield curve has inverted is absent today.

Mar 25 2019

How SWEET It Is!

  • Mar 25, 2019

Stocks do best in times of general price stability. In the post-war era, the stock market has provided investors with significantly higher returns and lower risk whenever the annual rate of consumer price inflation has been between 1% and 3%. However, when outside this “Sweet Spot”—when the porridge is either too hot or too cold—investment results are far less hospitable. 

Mar 18 2019

Growth & Inflation?

  • Mar 18, 2019

U.S. economic growth has recently slowed and may weaken further in coming months. Moreover, inflation still lingers—commodity prices have bounced, both core consumer and producer price inflation remain near recent highs, and wage inflation is steadily rising. Investors face two big questions.

Mar 11 2019

Bond Market Message?

  • Mar 11, 2019

The stock and commodity markets have been messaging confidence in the future of this economic recovery since the December stock swoon. The S&P 500 has surged by about 10% so far this year on strong breadth led by economically-sensitive small cap stocks and cyclical sectors, while traditional defensive equities have lagged. 

Mar 04 2019

‘Betting To Beat’ The Market?

  • Mar 4, 2019

The macro-investment environment can be simply described by two dimensions—the directions of real growth and inflation. Since the performance of both the stock and bond markets are highly responsive to these two factors, investors need to be mindful of their macro bets. 

Feb 25 2019

Balance Sheet Recession Risk?

  • Feb 25, 2019

Arguably, the biggest risk facing the stock market is a recession. Currently, traditional recession gauges are mostly comforting and a key indicator—balance sheet health—is remarkably strong. Often, recessions occur when financial health deteriorates, limiting household or business capabilities and lowering confidence.

Feb 19 2019

Make RISK Great Again!

  • Feb 19, 2019

Economic growth in the contemporary expansion has been perpetually weaker than any in the post-war era. Many explanations have been offered for why the U.S. is stuck in low gear, including aging demographics, overextended balance sheets, overused and increasingly ineffective economic policies, and a tech-boom-induced world awash with excess capacity. 

Feb 11 2019

Nothing But Noodling?

  • Feb 11, 2019

Just some noodling over an array of issues including:

  • What private sector confidence currently suggests about the stock-bond allocation tilt?
  • Is the fuel for Populism fading? 
  • Will winning the trade war cause U.S. stocks to lose?
  • How have stocks performed once the unemployment rate bottoms?
  • What does a 2019 U.S. economic slowdown imply for the 2020 election?
  • A nice revaluation refresh for stocks!
     
Feb 04 2019

‘EMERGING’ For The Finish?

  • Feb 4, 2019

Emerging Markets (EM) are not generally considered defensive investments and, therefore, investors do not often turn toward these economically-sensitive stocks near the end of a bull market cycle. However, as Chart 1 highlights, if the current economic expansion/bull market is in its late innings, perhaps you should consider “Emerging for the Finish.”
 

Feb 01 2019

Here Comes The Cavalry...

  • Feb 1, 2019

During the December carnage many Bulls were killed on the battlefield and others badly wounded. This year, although the skirmish has quieted, most remain on edge. However, investors may just now be jumping out of their foxholes because the Cavalry has recently been sighted coming over the hill with bugles blaring!

Jan 29 2019

Supportively ‘Sour’ Sentiment?

  • Jan 29, 2019

While many factors will determine how the stock market ultimately does this year (e.g., the pace of economic and earnings growth, valuation, policy support, and technicals), a few indicators show “sentiment” remains supportive for the stock market. 

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.