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The recent market volatility has investors questioning whether this bull run has legs. While Monday’s bounce after last week’s selloff provided some relief, the bigger story may be what hasn’t happened yet. According to veteran Wall Street strategist Jim Paulsen, this bull market is running on half-empty when it should be firing on all cylinders.

The conventional wisdom suggests we’ve already squeezed most of the juice from this rally. That perspective misses a crucial point: this entire bull run has developed under restrictive Federal Reserve policy. We’ve witnessed something remarkable yet underappreciated. The market has climbed higher while fighting headwinds that typically ground rallies before they begin.

Consider the landscape. High fed funds rates, an inverted yield curve, and sluggish real money supply growth have characterized this entire cycle. These conditions typically signal economic distress, not the backdrop for sustained equity gains. Yet here we are, with major indices reaching new heights despite these traditional warning signs.

The yield curve inversion tells a particularly compelling story. When long-term rates fall below short-term rates, it usually reflects pessimistic investors expecting an economic slowdown. This inversion has persisted throughout our current run, creating a psychological weight that has kept many investors cautious even as stocks climbed.

Consumer confidence presents another untapped reservoir of potential. Currently hovering near record lows, this metric has historically proven to be one of the most powerful drivers of stock performance. Since 1960, months when consumer confidence rose produced average annualized S&P 500 gains of 15.8%, compared to just 1.5% during months of declining confidence. The math here is staggering and suggests enormous upside potential if sentiment shifts.

The Federal Reserve’s monetary policy stance represents perhaps the biggest opportunity. Historical data reveal that the S&P 500 has generated average annualized gains 10.5 percentage points higher during Fed cutting cycles compared to tightening periods. We’re potentially sitting on the precipice of such a cycle, with last week’s weak jobs data adding fuel to the rate-cut narrative.

Dollar strength, another byproduct of tight monetary policy, has created additional headwinds for American companies competing globally. A shift toward easier policy could weaken the dollar, providing relief to exporters and multinational corporations that have struggled with currency translation effects.

The mortgage market offers yet another channel for potential improvement. Lower rates would reduce borrowing costs, potentially revitalizing real estate markets and freeing up consumer spending power that has been constrained by elevated financing costs.

What makes this analysis particularly compelling is the recognition that traditional bull market supports have been largely absent. This rally has succeeded despite, not because of, favorable monetary conditions. The implication is clear: if the Fed shifts toward accommodation, we could witness the unleashing of forces that have been suppressed throughout this cycle.

Critics argue that rate cuts aren’t necessarily coming. Bank of America recently suggested markets may be “conflating recession with stagflation,” with the Fed potentially keeping rates elevated until 2026. This skepticism is healthy and prevents overconfidence, but it also highlights the potential magnitude of moves if policy does shift.

The data suggests we’re looking at a bull market that has been operating with significant constraints. Remove those constraints, and the historical patterns point toward substantially higher potential returns. Whether that scenario unfolds depends largely on Fed policy decisions, but the framework for understanding what could happen is already established.

This isn’t about guaranteed outcomes or market timing. It’s about recognizing that this bull run has achieved remarkable results while operating under conditions that historically dampen equity performance. If those conditions reverse, we may discover that what we’ve seen so far was just the opening act.

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