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Paulsen: Tax Cut May Lead to Overheating, Help to End Bull Market

financialsense.com / FS STAFF / 10/18/2017

Jim Paulsen, Chief Investment Strategist for the Leuthold Group, discusses his outlook on the US stock market and the economy with FS Insider. He is still bullish, citing 3 basic pillars holding up this bull market, but also explains why a tax cut at this point in the cycle will likely do more harm than good in the short-term, even though tax reform is important long-term for US competitiveness.

No Need to Panic on Rate Hikes

Though the Fed has been raising rates, real rates are still negative. Historically, the three-steps-and-a-stumble rule says that once the Fed tightens three times, that signals the end of the recovery and the beginning of the bear market, Paulsen stated.

However, with unprecedented levels of stimulus and debt, “monetary policy [is] so far out of bounds from anything it used to be,” Paulsen said, and getting back to normal may take quite some time.

The Fed has already raised interest rates four times since 2015, and yet the Fed funds rate is still about a half of a percent or more below consumer price inflation. As a result, rate increases haven’t had much impact as the economy and stock markets continue to accelerate.

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