Jim Paulsen, chief investment strategist for Wells Capital Management, publishes a regular market newsletter on current economic and market trends.
In his latest Economic and Market Perspective, he notes that the market has dealt with several potential risks this year from the Greek crisis to the Chinese stock market collapse.
But he believes the biggest market challenge — Fed tightening — is still ahead in the second half.
With the Fed intent on raising interest rates this fall, Paulsen points out several current market and economic conditions and historical precedents to indicate the market is vulnerable.
A mature corporate earnings cycle, tight employment market and a long stretch since the last market correction, among other conditions, puts us in the "mother" of all monetary easing cycles, he said.
"It seems a bit unrealistic to expect the stock market to simply skate right through as the Fed finally attempts to turn the monetary boat for the first time in this unprecedented monetary cycle. Perhaps, the stock market will surprise and continue to zoom ahead even as the Fed finally begins to normalize policy," Paulsen wrote.
"However, the stock market has trended mainly sideways ever since the Fed stopped adding to quantitative easing last year," he said. "And it does not seem unreasonable for the stock market to struggle even more, at least for a time, with the first rise in short-term interest rates in almost a decade."
Patrick Kennedy