October 25, 2020 3 min read


Chief Investment Strategist: Further Fiscal Stimulus Not Needed

Growing calls from investors, executives and lawmakers for more fiscal stimulus to further support the economic rebound seem to ignore the strength of the economic recovery, James Paulsen, chief investment strategist at The Leuthold Group pointed out.

Avoid Noise for More Aid

In a note to clients Thursday, Paulsen defied Federal Reserve Chairman Jerome Powell who emphasized early in the month that too much aid would not be as detrimental as too little, and President Trump, who had repeatedly called for larger than the $2.2 trillion CARES Act.

James Paulsen advised investors to stay the course as some economic gauges suggest the economic recovery is progressing healthily and on track, with retails sales on record high, new orders improving and employment retracing half of what has been lost so far. The unemployment rate sank to 7.9% in September, a level achieved only after years in past recessions.

James Paulsen further noted that the response to the current economic downturn so far exceeded stimulus packages in any modern recession, finding similarities between current money supply growth and unemployment rate with September 2012 and January 1984 post-recession conditions.

Further Debt Expansion Risky

Despite showing the same unemployment rate and 75% fewer bankruptcies than in 2009, money supply is sitting at a historically high of 25%, Paulsen outlined, claiming the fiscal package in response to the pandemic “trounces past instances of massive accommodation”. He further outlined that previous spikes in money supply have brought inconsistent economic effects in terms of real gross domestic product (GDP), being above the average on two such spike occasions and below the average on another two.

The other two parameters, inflation and corporate earnings, have also shown mixed trends across cycles, Paulsen noted, stating that it would be best to avoid taking on fresh debt for an uncertain economic outcome.

“Nobody knows the long-term impact of the Federal Reserve’s massive balance sheet nor the surge in Treasury debt. The US could fix its short-run problems only to face more serious long-term challenges.”

James Paulsen, Chief Investment Strategist, The Leuthold Group

Markets Rally the Only Consistency

Historically, major recession cycles proved to have only one consistency which is a stronger-than-average stock market rally, and now the annualized 10-year return on S&P 500 is 9.8% for the four post-policy cycles, Paulsen highlighted, concluding that currently the return rate beats the 6% average since 1915, even when inflation is taken into account.

Expanding the economic stimulus may influence risk-taking behaviors or drive up inflation, posing a growing risk to the damaged economy, the chief investment strategist argued, warning those who advocate further aid should weigh the potential of its pitfalls. Paulsen told the group customers to brace for some volatility and strong market gains.

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