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Tags: Paulsen | stocks | poised | correction

James Paulsen: Stock Market Looks Poised for Slide Into Correction

By    |   Monday, 29 June 2015 09:00 AM EDT

Thus far, the stock market has been able to withstand the Greek debt crisis and the likely beginning of Federal Reserve interest rate increases this year, with the S&P 500 index fluctuating less than 2 percent below its record high.

But the market's footing is fragile, says James Paulsen, chief investment strategist for Wells Capital Management.

"We've got two conditions that make it difficult," he told CNBC. "We've got corporate profit margins which are close to post-war record highs, and we're also nearing full employment. So it's difficult to find a growth rate that is good for the stock market."

Operating profit margins totaled 17.3 percent in the first quarter, and unemployment registered 5.5 percent in May, just above April's seven-year low of 5.4 percent.

Without an acceleration of economic growth, it will be difficult for profit margins to rise, Paulsen said. And even assuming stronger growth, stocks may slip as inflation pressure builds, he explained.

"It's very hard to find a Goldilocks growth rate right now that is good for the stock market, ... so maybe we're going to correct before we go higher."

Meanwhile, the stock market's breadth is declining, meaning fewer and fewer stocks are participating in the advance.

That has led many experts to call this a "stock picker’s market," because you must choose carefully to find a winner. But this isn't a good omen for the market, says MarketWatch columnist Mark Hulbert.

"By telling their clients this is a stock picker’s market, advisers think they are distinguishing the investment environment from other periods in which the majority of stocks participate in the market’s major trend," he writes.

"Little do they appreciate that, in effect, they are also declaring the bull market to be getting extremely long in the tooth."

And why is that? "The degree to which stocks move together in unison is a function of the market cycle," Hulbert explains.

"In bear markets the vast majority of stocks do so, whereas in bull markets stocks tend to march to the beat of their own drummer. It’s at market tops, therefore, when stocks’ moves in step with the overall market tend to be at the lowest point."

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StreetTalk
Thus far, the stock market has been able to withstand the Greek debt crisis and the likely beginning of Federal Reserve interest rate increases this year, with the S&P 500 index fluctuating less than 2 percent below its record high.
Paulsen, stocks, poised, correction
364
2015-00-29
Monday, 29 June 2015 09:00 AM
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