LIVE MARKETS-Recession panic with no recession might be just what the "Bull Doctor" ordered

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RECESSION PANIC WITH NO RECESSION MIGHT BE JUST WHAT THE "BULL DOCTOR" ORDERED

Retired strategist Jim Paulsen believes the stock market's substantial advance over the last several years has caused it to outrun its policy coverage, leaving it with insufficient support from either monetary or fiscal policies.

Paulsen, an economist and seasoned Wall Street watcher who most recently worked as chief investment strategist at Leuthold Group, notes that stocks have been under the weather in recent months.

The Russell 2000 small cap index .RUT has already declined by more than 11% since its November high. Additionally, he says that the S&P 500 index .SPX has been moving sideways for almost four months, while the venerable leader during this bull market – the Magnificent 7 index – suffered an intraday correction on Tuesday and has now been unchanged since last July.

According to Paulsen, monetary and fiscal policy support for the stock market is now lacking, and he thinks this may be one of the reasons the stock market has been struggling in recent months.

What would improve this situation?

Paulsen suggests a stock market correction that is driven by recession fears.

"If an actual recession resulted, the stock market would likely suffer a bear market. But, if a recession panic emerged while an actual recession was avoided (which appears likely), then policy support for the stock market could again become accommodative." writes Paulsen in his latest "Paulsen Perspectives."

In this event, he says that a recession scare would lower bond yields, drive the U.S. dollar down, force the Fed to again restart its easing campaign, and pump up both monetary and fiscal growth while stock market capitalization declined only modestly.

Paulsen's view is that "while it is never fun to experience a stock market pullback, a temporary stock market correction may be just what the 'Bull Doctor' ordered. A recession scare could boost monetary and fiscal support for the stock market, and in combination with lower bond yields, could retrofit the foundation for another leg higher in this bull market."

(Terence Gabriel)

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