The labor market is exhibiting resilience, and the economy appears to be maintaining stability, even amid the ongoing conflict in Iran. However, Jim Paulsen, a veteran Wall Street strategist and former chief investment strategist of The Leuthold Group, warns of troubling indicators beneath the surface of the stock market. In a recent Substack post, Paulsen noted that while the latest jobs report reflects a robust economy, the stock market is sending concerning signals.
Paulsen pointed out that despite a slight uptick in employment, the price trajectory of employment services stocks has been stagnant, suggesting no improvement in overall job conditions. He highlighted that this employment index’s stock price remains at its lowest level in nearly 26 years, signaling potential trouble ahead.
In examining the connection between consumer discretionary stocks and real retail sales, Paulsen observed a long-standing historical trend: these stocks typically move in parallel with retail sales performance. However, he has noted a consistent underperformance of S&P discretionary stocks compared to the broader market, hinting at weakened consumer spending. Since the decline of these stocks in 2020, inflation-adjusted retail spending has only shown modest growth.
“Consumer discretionary stocks are showing no lift from the recent better-than-expected jobs numbers, with their relative price currently near its lowest level since 2011,” Paulsen indicated. He expressed concern that the performance of consumer stocks on Wall Street suggests that retail results on Main Street are likely not to improve in light of better job prospects but may deteriorate further.
Adding to the economic red flags, Paulsen spotlighted cyclical stocks—firms whose viability is closely linked to the overall economic climate. Many cyclical companies also belong to sectors overlapping with consumer discretionary, including automotive manufacturers, travel and leisure services, and luxury retailers. He warned investors to carefully monitor these trends, asserting that cyclical stocks indicate a sentiment closer to recession than recovery.
“The relative stock price of the S&P 500 cyclical sector has collapsed since early this year and is currently trading near its lowest relative price since 1990,” Paulsen stated. He referenced historical patterns in the performance of these stocks, which tend to mirror actions observed prior to or during previous recessions in 1990, 2002, 2009-10, and 2020. The speed at which the relative price of cyclical stocks has plummeted, combined with their current low valuation, paints a bleak picture for the U.S. economy, according to Paulsen.
