A Wall Street chief strategist outlines 6 reasons why investors should beware a surprise economic shock
- The US economy looks solid at the moment, but Jim Paulsen, the chief investment strategist at Leuthold Group, says investors are ignoring the possibility of a downturn.
- Paulsen outlines six reasons why investors - who are immensely confident right now - should be keeping a close eye on the economy.
Anyone looking to poke holes in market sentiment would probably be wise to look beyond the economy.
After all, measures of economic expansion look solid at the moment, with one forecast calling for real gross domestic product to hit 4.6% in the second quarter.
But all good things must eventually come to an end, and investors would be wise to at least consider a scenario involving an economic slowdown in the second half of 2018, says Jim Paulsen, the chief investment strategist at Leuthold Group.
That's not to say Paulsen sees an imminent recession beckoning. Rather, he simply thinks investors are riding too high at the moment, and it's blinding them to the possibility that the economy could falter. As such, any downturn would come as a shock to many traders.
"Several indicators are suggesting economic growth both within the US and around the globe is poised to slow in the second half this year, perhaps taking Wall Street by surprise," Paulsen wrote in a recent client note.
Paulsen lists six indicators, to be exact, and each one is outlined below. All quotes attributable to Paulsen.
1) Global economic data is no longer beating expectations
"While Citi's global economic surprise index started the year near one of its highest readings of the recovery it is currently near one of the lower readings of the recovery. Often when this index goes negative, the upcoming pace of economic growth slows."
2) Monetary growth has slowed
"The annual rate of growth in the M2 money supply has slowed from 7.7% in October 2016 to only 3.7% today, its slowest pace since 2010. While the efficacy of monetary policy has diminished in the last few decades, the direction of liquidity still tends to lead the pace of economic growth."
3) Yield pressures
"Although the yield curve remains far from inversion (a recession signal), steeper or flatter curve movements during the last five quarters have historically been closely associated with a quickening or weakening pace of real economic activity in the ensuing year."
4) Rising oil prices
"Significant moves in energy costs have consistently led real economic growth ... The 50% jump in energy prices during the last year should now be expected to slow real GDP growth in the coming year."
5) Low unemployment and a weak US dollar is a bad combination for growth
"The U.S. dollar has declined significantly since it peaked at the start of 2017 and the U.S. unemployment rate recently dropped to its lowest level since 1970. The combo of a weak U.S. dollar and a low labor unemployment rate typically portends weaker real economic growth."
6) US economic data is forecast to stop beating expectations sometime soon
"When the year began, the U.S. surprise index was above +80 and it has since declined below +12. Based on movements in the U.S. dollar and the 10-year bond yield during the last 26 weeks, EM is forecasting a sizable decline in the surprise index during the next 26 weeks."
"This relationship has been fairly close since 2009 ... What will happen to Wall Street earnings estimates and how will the stock market react should the U.S. Economic Surprise Index decline to -40 later this year?"
