“Too much of a good thing can be wonderful,” Mae West once colorfully quipped. But the truth is, when it comes to bull markets that are 57 months old and have been fueled by easy money from the Fed, there’s a limit to how much good news they can actually take.
“Good news on the economy that’s good for the stock market now may turn to bad news at some point this year,” says Well Capital Management chief strategist Jim Paulsen in the attached video. “I think at some point though, the flip side of good economic momentum is going to become problematic.”
What that means is that soon - not quite yet - all the things that have fueled this record run up in stocks, will start to become headwinds Paulsen says, pointing to potential (and probable) rises in inflation, interest rates, wages and commodities to name a few.
This is not to say that this long-time unshakeable bull is capitulating because he is not. In fact, Paulsen thinks we could have another five years of bull market ahead of us. It’s just the intermediate term that he thinks could prove to be “flat and frustrating.”
“I think it’s going to be different than what we’ve had the last few years,” he says “but I still think the market, in the early part of the year, is going to continue to move higher,” adding that the S&P 500 could hit 2,000 and also deliver a ten percent correction this year before leaving us with little to show a year from now.
In the meantime, while Paulsen and his followers are still in the market, they’re on watch for any signs of change that things are building up, such as the ten year treasury yield backing up to 3% again.
“It’s not that serious yet,” Paulsen says but “if they go back up to 3.5 to 4% it becomes a more serious issue.”
In light of it all, Paulsen says he holds a contrarian view on the dollar and is expecting further weakness, as well as a preference for foreign markets, both emerging and developed.
“I really think that Europe and Japan are trailing the US recovery. They’re maybe a year or two behind where we are and that’s why I think their markets might have more upside as well.”
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