Leuthold Group Chief Investment Strategist Jim Paulsen said he expects stocks to continue to rise because of strong economic conditions and earnings, but he has a warning for investors that has nothing to do with the coronavirus.
“We have a fully employed economy with 3.5% unemployment, the longest recovery in post-war history, and I think if the economy picks back up, which I think it’s going to do, we’re going to start to feel some pressure on the resource markets. And so I think still that overheat pressures — a rise in inflation and much higher yields — before this cycle ends ultimately is going to be the primary risk,” Paulsen explained on CNBC’s “Trading Nation.” “That could happen quickly if economic growth spurts much more than anyone’s thinking this year, or it could drag out over a few years.
“But I do think as we continue to grow, you’re going to see consumer prices, wages, commodity prices — costs in general — start to pressure business operations, household budgets and, ultimately, the valuations of the stock market.”
Paulsen said he’s most focused on the fundamentals of the economy and how he sees things picking up around the world after a slowdown in 2019.
“You see that with economic surprise indices rising not only here in the United States but in the Eurozone pretty significantly and even in emerging-market economies,” he said. “You’re certainly seeing it in the United States with better data on ADP employment, on factory orders, on consumer confidence, just an array … . And then even the earnings season has been pretty good here for the fourth quarter overall.”
For the time being, Paulsen said he remains bullish on where the stock market is positioned.
“Inflation is not a problem. So until there’s some pressure, I think you have got to stay fairly bullishly tilted here,” he said. “Even though we’re going to have pullbacks, I think the economy is going to pick up. That might bring some pressures but we certainly don’t have any yet.”
On the Coronavirus Impact
“I’m not a pandemic expert by any means; it could get really serious, I don’t know,” Paulsen said. “But I think the right thing to do there is diversify — everyone should be diversified, and beyond that I don’t think you do much with it. Chances are it will be a short-run event, at least economically and we’ll probably move on from it, and maybe we already are.”
On the Democratic Primary Field
“I think for the market, as the Democratic primary goes along it might give some rise to who’s ahead and who’s falling behind,” Paulsen said. “I think it’s going to have headline risk for the stock market and I think there will be days where a Bernie (Sanders) or a (Elizabeth) Warren pulls ahead, it might scare the stock market some. But I think overall, those are temporary and not persistent trends. Even if one of the socialists, quote unquote, wins the presidency in this country, I’m not too worried about the impact that will have as long as one party or the other doesn’t get tri-power.
“If one party gets all three powers, the House, the Senate and the White House, then in that case, a lot can happen. But short of that, it will be mainly gridlock and the economy itself will manage and drive. So I’m not overly worried except for the headline risk.”