Paulsen's Perspective

One of the most striking aspects of the new year is “optimism.” Among individual investors, the proportion of bulls less bears nearly reached its highest level last week since early 2004. With the stock market regularly setting new record highs, it’s not only Wall Street that is elated. Both consumer and business confidence measures also are near post-war highs and the U.S. Federal Reserve remains confident enough to keep raising interest rates! Perhaps for the first time, the mainstay of this recovery—a perpetual Wall of Worry—has evaporated. 

• Read more

Welcome to 2018!

Compared to the start of any other year during this recovery, things feel pretty good. The U.S. just finished what is likely the only back-to-back-to-back quarterly 3%+ real GDP growth rates of the recovery, the unemployment rate is within an eyelash of a 50-year low, U.S. real median income finally reached a new record high (i.e., the recovery has reached Main Street), holiday sales reportedly jumped by 4.9%—the biggest increase since 2011, and consumer confidence recently rose to its highest level since 2000.

• Read more

As shown by the chart, the U.S. Economic Surprise Index (ESI) rose to a six-year high last week. This is only the second time in the recovery (briefly in 2011 and again briefly in 2012) that economic surprises have been this consistently positive, and it’s only the third time since the inception of the surprise index in January 2003. If it feels good lately, it’s because it has been!

• Read more

- noun  com•pla•cen•cy  \ kəm-ˈplā-sᵊn(t)-sē \

• Read more

Wall Street is entirely focused on the pending tax cut. However, where will mindsets turn in the New Year?

• Read more

Energy stocks have persistently underperformed throughout this bull market. The relative total return performance of the S&P 500 Energy sector since the start of this bull market is the worst of all 11 sectors, trailing the overall S&P 500 index by almost 270%! Understandably, this chronic underperformer offering little positive price momentum is significantly underweighted in most portfolios. However, a simple valuation technique based on the relative price of crude oil suggests energy stocks may soon start outpacing the overall market. That is, Oil says it may finally be time to BUY Energy stocks!

• Read more

The financial markets have recently been bolstered by an unexpected acceleration in economic momentum without a noticeable worsening in inflation or bond yields. At the beginning of 2017, most anticipated another 2%-ish growth rate in the U.S., and few recognized the global recovery was headed for a synchronized expansion. However, the U.S. appears poised for a third consecutive quarter of real GDP growth in excess of 3%, and participation in this global recovery has never been broader. Moreover, since improved economic growth has not aggravated inflation or bond yields, many believe the stock market is in a sweet spot headed for a melt-up.  

• Read more

Business investment has not played a central role in the contemporary economic recovery or bull market. Persistently sluggish growth, high unemployment, disinflation, and fears of another imminent recession have kept economic behaviors far too conservative for a capital goods cycle. However, recent conditions have become much more conducive for investment, increasing the possibility this recovery could end with a capital goods crescendo.

• Read more

Volatility has always been an integral part of the stock market. Prices go up and down and investors have long recognized that the frequency and magnitude of these swings often provide valuable information about the future. The Vix Volatility Index, the Average True Range, and Bollinger Bands are just a few examples of volatility indicators regularly monitored by traders to help assess bullish or bearish sentiment, overbought or oversold conditions or a peaking or basing pattern.

• Read more

The juice fueling this bull market may finally be running low. During the last six months, financial liquidity has contracted mildly, signaling the foundation under investors’ feet may be turning to sand.

• Read more

Some significant changes in the economy next year could impact sector leadership within the stock market. First, even if economic activity remains healthy, positive economic surprises seem poised to soon wane. Second, capital spending has recently strengthened and this could become more pronounced next year. Third, the U.S. unemployment rate seems destined to fall below 4% in 2018, aggravating inflation/overheat fears and forcing both the Fed and bond vigilantes to raise yields. Finally, we expect the U.S. dollar to resume declining again next year which should boost commodity prices including the price of crude oil.

• Read more

In the post-war era, 3% has acted like a toggle switch on Wall Street.

• Read more

In the last couple years, the stock market has been bolstered by persistently positive economic surprises. Even if the economy remains strong next year, however, it may not have the same supportive impact for the stock market since its ability to “surprise” is fading. A leading indicator of U.S. economic surprises points to a likely peak during the first quarter of next year, and without chronic positive reinforcement from the economy, the stock market could struggle. We continue to expect stock prices to rise mildly higher through year-end and do not think signs currently suggest a bear market. Nonetheless, a chronically supportive force for this rally during the last couple years may suspend in 2018. That is, the economy is close to “surrendering surprise.”

• Read more

A major investment wild card is whether productivity ever makes an appearance in this recovery. U.S. productivity has grown more slowly than any recovery of the post-war era despite a revival in corporate profits to record highs, long-term interest rates which have hovered near record lows, and despite uncommonly high levels of business net cash flow relative to capital spending.

• Read more

Bear watch has intensified and perhaps for good reason. Key indicators traditionally monitored by investors are suggesting caution. For example, most valuation measures depict a stock market which is highly-priced. The economic recovery is now in its ninth year, making it the second oldest in U.S. history. The Federal Reserve has already raised the Funds rate four times, threatens another hike yet this year, and is about to finally begin contracting its extensive balance sheet. A lack of VIX volatility has increased fears that no one is fearful enough. And, finally, FANG leadership has left an impression it may be the Nifty-Fifty all over again.

• Read more

Just a Monday-quickie to “Curb your Enthusiasm”…

• Read more

As the economy returns to full employment, its character is maturing and investors need to be cognizant of how this may change leadership in the stock market. Until recently, the economic recovery was characterized by disinflation, falling yields, Fed accommodation, and fear of returning to another crisis. Mostly, the stock market reflected this character being led by the perceived safety of U.S. stocks, the stability of large company stocks and by steady-eddy consumer sectors, internally-generated growth stocks, and bond surrogates.

• Read more

Small Cap stocks have had tough year. In mid-August, the total return on the Russell 2000 index trailed the S&P 500 index by about 9%. Since, however, Smalls have done much better, outpacing Large Caps by about 3.5%! Did Small Caps turn a corner in August? Here are six factors which should keep Smalls leading.

• Read more

The Federal Reserve wraps up its meetings today and will deliver a press conference. Here are four reasons (in pictures) not to Fret the Fed.

• Read more

The U.S. economic expansion is in its ninth year, surpassed only by the 1990s’ ten-year recovery.

• Read more