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Retired strategist Jim Paulsen thinks last Friday's surprisingly weak jobs report is more than just a one-off disappointment. In his view, it's the latest piece of evidence suggesting U.S. economic growth is losing momentum again.
Paulsen, the veteran economist and former chief investment strategist at the Leuthold Group, points to a growing list of headwinds that he believes have been working their way through the economy. Higher bond yields, a flatter 2s/10s Treasury curve, sluggish real money supply growth, a shrinking federal deficit-to-GDP ratio, a stronger dollar and higher energy prices have all combined, with the usual lag effects, to cool economic activity.
As a result, Paulsen expects inflation concerns to fade over the rest of the year, while growth worries begin to take center stage.
"Expect inflation fears to moderate in the balance of this year and for real economic growth and recession fears to broaden," he wrote in a note published Monday.
That shift could reshape how markets interpret falling bond yields.
According to Paulsen, investors are still largely viewing lower Treasury yields as good news for stocks because they signal easing inflation pressures. Friday's reaction fit that script, with yields falling after the jobs report and all three major indexes ending the session higher.
But Paulsen doubts that relationship will hold if yields continue to decline.
At some point, he argues, falling yields may stop reflecting improving inflation dynamics and instead start signaling growing concern about the economy. If that happens, stocks and bond yields could begin moving lower together as recession fears intensify.
Importantly, Paulsen is not forecasting an outright recession. Rather, he expects a period in which recession worries become pronounced enough to rattle investors.
In his view, those fears could be severe enough to trigger an S&P 500 correction and send the technology sector into a bear market before year-end, even if the economy ultimately avoids an outright downturn.
(Terence Gabriel)
