As the second quarter’s GDP growth was revised upward to 4.2% from 4.1% Wednesday, the Leuthold Group’s top investment strategist cautioned that this good economic news could lead to an eventual problem for the stock market.
Jim Paulsen, on a CNBC appearance, said that with “anywhere close to 4% growth in the rest of the year, I’ve just got to believe they’re going to push … inflation, wages, and the 10-year yield above 3%.” He was hinting that, as many economists fear, faster Federal Reserve rate hikes, never a friend to the market, would result.
Right now, the Fed is embarked on a regimen of gradual increases in short-term rates, with two more quarter-point boosts expected this year. In part, that is meant to tamp down any inflation, which in July was running at a 2.4% annual pace (not counting food and energy). That is higher than the levels since the Great Recession, which were closer to 1%.
“I do think the market is still going to have a struggle finding this silver lining, ‘Goldilocks’ path,” Paulsen added, “because you could get either too hot or too cold in a hurry here this late in an economic cycle at full employment.”
The 4.2% annual increase in gross domestic product in the June-ending quarter is the fastest growth rate since 2014’s third quarter. But in 2014, the unemployment rate was just over 6%, versus the 3.9% rate hit in July. So wage cost pressure is slowly mounting.