The combination of Hurricane Harvey and another round of geopolitical turmoil from North Korea has spurred fears of market and economic disruption. But one pro says both could be setting the stage for a big upsurge.
Economists expect Harvey in particular to cause untold billions of dollars in damages, while Kim Jong Un’s latest missile test again has put the world on alert for war in Asia.
However, Jim Paulsen, an economist and chief investment strategist at the Leuthold Group, believes that closer to home something more important is happening. A decline in the dollar and drop in interest rates is providing a boost to longer-term growth, which he expects to show up soon in better-than-expected economic data.
Specifically, Paulsen sees this chart as indicative of what’s ahead. It plots the Citi Economic Surprise Index [the brown line and the left axis] against the Economic Momentum Indicator [the blue line and right axis] with the latter leading the former:
Earlier this summer, the surprise index was at multi-year lows but has since rebounded. The index measures economic data against consensus estimates.
At the same time, the EMI index, which is a weighted change in the percent changes of the dollar index and the 10-year Treasury yield over the past 26 years, has been on a steady path lower for most of the year. [Note that the right EMI axis moves from positive numbers to negative, with negative being stimulative.]
“Combined, as shown by the blue line, the policy stimulus provided by a weak dollar and weak yields has propelled the EM indicator to one of its highest levels of the entire recovery!” Paulsen wrote in a note.
“The relationship between the EM indicator and U.S. economic surprises is certainly not perfect. However, the EM indicator suggests that, six months from now, the surprise index could be near +50,” he added. “If this is even directionally correct, economic momentum is likely to rise in the aftermath of the current crisis, thereby providing support for the stock market.”
Other economists have noted that the fallout from Harvey could see initial economic damage then a recovery once relief and reconstruction efforts begin.
And the U.S. economy did indeed already seem to have momentum. The Atlanta Fed’s GDP tracker is indicating a gain of 3.4 percent in the third quarter — CNBC’s Rapid Update puts the number at 2.9 percent — following tepid first-half growth.
“Many pundits today are understandably focused on the unfolding human tragedy and on the immediate economic hit from Harvey,” Paulsen said. “What has received virtually no consideration, however, is the significant stimulus which has been added to the economy in recent weeks. Investors should entertain whether improved economic momentum in the next few months could abate, and reverse, recent stock market turbulence.”
WATCH: Harvey is taking its toll on local energy operations.