Jim Paulsen, author of Paulsen Perspectives, breaks down why Fed easing could spark a broad market rally.
Transcript:
CAROLINE WOODS: What are some of the value sectors right now? Because we have seen more participation, if you will, outside of tech. We have industrials higher, utilities higher. So it isn’t just a tech rally. But to your point it hasn’t been as broad based. So tell us some of the value sectors you found?
JIM PAULSEN: Well the places I would look right now is I think a key to this is going to be the reason we’ve had such a narrow bull market, I think, is because the Federal Reserve in this bull market has been tight throughout almost its entire existence. It’s eased in three months, late last year, and outside of that, it’s been raising rates for being tight with monetary policy throughout the bull, it’s a rarity. If I go back and post-war history, almost all bull markets begin with monetary easing and have easing going on during a substantial portion of the bull. This one has lived its entire existence under tightening. I think that’s why it’s been such a narrow advance. It’s when you have tightening going on monetary tightening, it kind of wipes out a lot of the general stock market that needs monetary liquidity, that needs lower interest rates to perform, and it puts us into the most conservative, not really conservative, but unit growth companies there that aren’t as dependent upon policy easing to get their earnings. And that is the quintessential technology inherent growth stock, which has been the pinnacle of this bull market. I think though, the Fed’s getting close to easing, if we can get this tariff thing resolved before too long, I think the Fed’s going to ease into this and will be the first easing really on a consistent basis of this bull market, and I think that’s going to awaken a lot of parts of the stock market we haven’t seen yet. I think, you know, when we drop rates, you’re going to the liquidity or monetary growth rate is going to pick up. And I think the biggest one of the biggest beneficiaries is going to be small cap stocks. Overall I know they’ve been left for dead. And I even have trouble saying or recommending them because they’ve been dead for. So long. But I do think it’s been tied to Fed policy. And if that changes, I think that’s going to change right into the sweet spot of small cap stocks. I would also point out just in the last month or so, micro cap stocks have picked up a fair amount relative to small caps. The Russell 2000. And maybe that’s a sign from the very bottom up that capitalization is starting to awaken a little bit. I’d also point out that we’ve had a little better activity in, you know, IPOs and some of that things, which is down on the cap spectrum as well. So I there might be some good signs going on there because in part the money supply is starting to rise again. It was negative 4. So long. Year on year, at a record setting like the time that it’s now, back positive and still growing and that could help that sector. I think there’s a lot of values throughout that entire marketplace. I also like international stocks in general, because we’re already seeing if we drop rates and increase the US money supply in a slower growing US economy that’s going to bring the US dollar down. It’s already starting to occur as the money growth’s picked up. Is concerns about growth slowing a little bit has come down. You can see the dollar weakening. And that’s enlivened the international stock markets which really they’re doing about as well as some of the tech sectors here in the United States with dollar weakness. I think that’s going to continue. The dollar is extraordinarily high at the start of this year. The real value of the trade weighted US dollar index got to within a couple percentage points of its all time record high in March of 1985. And you could argue that in the last decade, the dollar has gone up about 50% in real terms. That’s one of our tightest dollar policies we’ve ever employed since the dollar began floating in the early 1970s. And it’s killed international stocks more than anything.
Watch the full interview with Jim Paulsen here:
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