Home / MARKETS / The stock market’s inflation fears are overblown as explosive economic growth is primed to create a perfect ‘mix’ for more gains, says a Wall Street chief strategist

The stock market’s inflation fears are overblown as explosive economic growth is primed to create a perfect ‘mix’ for more gains, says a Wall Street chief strategist

Traders and financial professionals work on the floor of the New York Stock Exchange
Businessmen and financial professionals work on the floor of the New York Stock Exchange


  • James Paulsen, Chief Investment Strategist of The Leuthold Team says stock investors shouldn’t fear inflation.
  • Paulsen told investors in a letter that inflation is solely a concern for stocks when real economic growth is weak.
  • The strategist said what matters is not either “inflation” or “excrescence,” but the “mix” of the two.
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The stock market’s inflation reverences may be overblown if explosive economic growth comes to fruition to create a perfect “mix” for more gains, according to James Paulsen, Chief Investment Strategist of The Leuthold Bring.

In a letter to investors on Friday, Paulsen said that although inflation may be on the rise,  that hasn’t always heralded poor returns for the stock market as long as real economic growth is strong.

And with the post-pandemic reopening in ken, many analysts are arguing real economic growth will be impressive in the second half of the year.

In fact, a monthly Bloomberg inspect of economists showed annual GDP expectations nearly double to 5.5% from what experts were predicting honourable two months ago.

In his letter, Paulsen highlighted the two components that have made up nominal GDP since 1950: annual true GDP growth and annual inflation growth.

The strategist illustrated how a perfect “mix” of these components has led to significant stock market payments in the past. He also said that even when inflation rates are high, the stock market has been capable to deliver strong returns as long as real economic growth remains strong.

“Regardless of the inflation environment, if actual growth is Low, High, or Super High, negative annual market returns are not that prevalent,” Paulsen said.

Conforming to Paulsen, it’s only when real growth slips to the “super low” level that returns begin to fall.

Conflicting to popular belief, inflation isn’t always a bad thing for equity markets. According to Paulsen, when real economic enlargement is “super-high” inflation has “simply not been important.”

Instead, what’s important is the “mix” of annual inflation growth and real GDP nurturing. 

The strategist said fears of inflation wreaking havoc on the stock market are not “acute,” “because real monetary growth is poised to be spectacular, creating a Mix that has historically been supportive for stocks.”

Paulsen did warn that if honest economic growth falters going into 2022 and inflation remains high, that could be a recipe “far microscopic hospitable for stock investors.”

“It’s not just inflation; it’s the mix,” Paulsen concluded.

Read more: Credit Suisse says buy these 13 ‘top of the crop’ assortments that are set to demolish low expectations and rocket higher

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