We Asked Jim Paulsen What Happens When 87% of the Economy Can No Longer Be Ignored

90% of the economy is being ignored

While markets obsess over AI and the Magnificent Seven, approximately 87-90% of the U.S. economy is weak and growing near stall speed, creating a bifurcated 'bust booming' environment.

Policy stimulation is urgently needed

Paulsen believes both monetary and fiscal authorities will need to inject 'policy juice' to prevent the weak majority of the economy from dragging the aggregate into recession.

Recession odds have increased slightly

While he maintains that a recession remains unlikely, Paulsen notes the probability has risen over the past 60 days due to sustained economic weakness and geopolitical pressures.

The 1970s inflation comparison is flawed

Unlike the 1970s when surging labor force growth created excess demand, today's inflation stems from supply constraints with labor force growth below 1%, making demand-slowing policies inappropriate.

Fed will be forced to cut rates

Paulsen predicts the central bank will pivot to easing this year not by choice, but because economic weakness will 'wag the dog' and force officials to prioritize growth over inflation fighting.

Bond yields headed lower

He maintains a constructive outlook on bonds, expecting yields to decline as growth concerns overtake inflation obsession and policy easing commences.

Oil prices are divorced from Fed policy

Paulsen argues crude will not decline until the Iran conflict resolves or the Strait of Hormuz reopens, and Fed rate hikes have no bearing on supply-driven energy prices.

Tech leadership hinges on policy tightness

Mega-cap tech outperforms when policy is tight or paused, but underperforms during easing; conversely, small caps, value, and international stocks require monetary/fiscal stimulus to lead.

Investors are complacent and overweight

Current sentiment reflects reluctant compliance, with investors knowingly overweight tech but unwilling to rotate until a definitive breakdown occurs, setting up potential forced selling.