Greenspan Gradualism Please, Enough With Shock-And-Awe, Expert Says

Will the Federal Reserve please give up its efforts to impress the world.

What the economy and investors need is small policy tweaks, according to a recent report by veteran Wall Street expert Jim Paulsen, chief investment strategist at Leuthold Group.

“Periods of ‘Ho-Hum’ policy have represented the stock market sweet spot,” the report states. “to the extent that stocks do better, a boring policy agenda is similarly advantageous to the economy.”

Paulsen bases this on an analysis of decades of market and sentiment data. Over the period 1978 through to 2022 he looked at the opinion of government policies based on the Michigan Consumer Sentiment Survey (MCSS).

The research found that “economic strategies have been regarded as negative slightly more often than not,” the report states. The sentiment scale ranges from 50 to minus 50, and the average reading was -9.4.

That finding shouldn’t be too surprising. Government isn’t known for been the bastion of efficiency or good economic choices.

However, it is what comes next that is truly interesting for investors. Stocks performed far better when consumers viewed policies as neither awful or awesome. Rather the ‘meh’ category seemed to appeal to Wall Street.

“The S&P 500 enjoyed a sweet spot when economic policies were thought to be mundane,” the report states.

Specifically, when the MCSS readings were in their middle quintile, between approximately minus 5 and minus 15 the market saw huge rallies over the next year. The annualized gains for the year ahead were 23.1% the report states, and saw market declines in one-in-four months.

That’s a contrast with periods when the sentiment readings were outside the middle quintile. In those cases the S&P 500 saw comparatively lousy gains averaging 7.1%.

So far this year, the SPDR S&P 500 exchange-traded fund (SPY
), which tracks the S&P 500 index is down 17%, according to Yahoo. Worse still, the outlook for bonanza returns doesn’t look good for the next 12 months, based on the recent MCSS readings which are well outside the middle quintile, on the negative side.

Of course that may change if the Biden administration can start making what Paulsen dubs ‘mundane’ policy changes and moves sentiment into the ‘meh’ middle quintile.

“Officials should take note; Less Shock and awe and more Greenspan gradualism,`’ the report states referring to to Fed chief Alan Greenspan who helped keep the inflation low and markets relatively stable over the 1990s and into the new millenium.

The report continues:

• “Refrain from excessive & impulsive responses, limit the number of Fed pressers & board member interviews, and avoid having frequent congressional tax & spend fights. Focus less on being a touchy-feely, transparent communicator and instead concentrate on implementing measures with a ho-hum, low-profile, and lackluster behind-the-scenes approach.”

Or put bluntly, stop seeing the limelight and instead do your job.