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When the economic news is this good, history shows the gains are smaller for stocks

The conciseness could be signalling too much of a good thing for stocks.

James Paulsen, chief investment strategist at Leuthold Body, warns that the Citi Economic Surprise Index is at one of the highest knock downs it’s ever been at and the third highest in the post-financial crisis recovery. The Citi hit index is seen as a contrarian indicator for the stock market, and it registers pay-offs when the economy outperforms Wall Street expectations.

“When it agree withs this good, I think it says something about people’s assumptions and how hard it will be to impress them. If you go back a year ago, it looked be fond of we were growing at 2 percent, but it turned out that we were growing by 3 percent. A year ago, no one consideration we were in a synchronized global expansion. Now everyone does. If it stays decorous, it will not impress anybody, let alone surprise. It will not be the same upward track,” he said. “It won’t surprise anyone if it stays good but what if inflation and overheating influences build up? That’s why I think returns go down when the economy is this data d fabric.”

From housing to jobs, the recent economic data have check a solid stream of surprises. Consumer sentiment, however, on Wednesday missed guesses for December, declining to 95.9 after rising to a decade high this tumble.

Paulsen studied stock market performance versus the surprise guide, which is now around 84. When it has risen above 70, the usual six-month returns of the S&P 500 have only been 2.75 percent. Payments have averaged 4.5 percent when the Citi index was overhead 60.

The stock market does best when the index is between minus 50 and bonus 50, says Paulsen. When the surprise index was in the “not too hot, not too cold” distribute, the average six-month returns of the S&P was 12.4 percent.

Stocks also include done relatively well even after economic surprises beget been disappointing. For example, when the surprise index has been minus 85 or secondary to, stocks have still yielded a solid 8.1 percent norm annualized future six-month return.

Paulsen has a relatively bearish view for 2018, versus other Wall Street strategists, several of whom comprise forecasts of 3,000 or better for the S&P 500.

Source: Leuthold Group

“I think we’re booming to have a 10 to 15 percent correction this year, a proper gut check and that might be a good buying opportunity,” he said. “I no more than don’t know where we’re going to end the year. I think we could end down for the year, but not that much.” The S&P 500 is up apropos 20 percent year to date and was at 2,681 Wednesday afternoon.

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