High GDP May Lead to Market Problems, Paulsen Says

Leuthold strategist fears hot economy will push up inflation, threatening advance.

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.

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