Economic Slowdown Looms: A 10-15% Stock Correction May Be on the Horizon
As the year 2024 comes to a close, investors are bracing themselves for a potential economic slowdown in 2025. According to Jim Paulsen, chief investment strategist of The Leuthold Group, the likelihood of an unexpected economic downturn could lead to a stock market correction of 10-15%.
Weakening Growth Signals
Paulsen points to several indicators that suggest economic growth is slowing. The Citi Economic Surprise Index, which measures the difference between economic reports and expectations, has been declining. Historically, movements in bond yields have led to economic surprises, and declining yields have meant an improving economy three months out. However, with bond yields hovering near 4.6%, Paulsen predicts the economic surprise index will slow to -35 in the first quarter, leading to a slowdown in GDP.
Financial Conditions Index Raises Concerns
The U.S. Financial Conditions Index has been worsening since early December, a trend that has led to significant stock market events in the past. Paulsen notes that if financial conditions continue to deteriorate, it could lead to a correction in the stock market.
Deteriorating Breadth and Investor Caution
Paulsen also highlights deteriorating breadth, where the number of U.S.-listed stocks climbing relative to the number falling has been dropping since early October. This suggests investors are becoming increasingly cautious, and underperformance by cyclical and more aggressive stocks since mid-November further supports this notion.
Technology Sector Performance Holds the Key
The likelihood of a correction and its depth depend heavily on the performance of technology sector favorites in 2025. If tech stocks continue to perform well, a correction can be avoided. However, if they slow down, it could lead to a broader market correction.
Defensive Investing May Be Prudent
Given the potential for a correction, Paulsen suggests a small shift away from cyclical and other “traditionally aggressive investments” toward more defensive ones may be prudent. However, he emphasizes that corrections are tough to call and most investors should stay invested, as the bull market is likely to continue during 2025, albeit with some bumps along the way.
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