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Market bull Jim Paulsen predicts manufacturing will rebound and drive stocks deeper into record territory

Manufacturing holds key to the market's next leg higher: Jim Paulsen

The market's next big test may come Friday.

That's when the Institute for Supply Management releases its October U.S. manufacturing purchasing managers' index.

According to The Leuthold Group's chief investment strategist Jim Paulsen, it will be an even more important market event than this week's Federal Reserve decision on interest rates.

"The manufacturing recession, globally and particularly in the United States, is one of the primary reasons that people fear a recession," he told CNBC's "Trading Nation" on Wednesday.

Last month, the survey contracted to its worst level in a decade, fanning jitters about a recession.

"That really set off a sell-off in the stock market and escalated recession fears," said Paulsen. "If we see solid data here in the next few months that the manufacturing sector is bouncing given how healthy the consumer sector is, I think the recession ghost will be thrown away."

Paulsen, who correctly predicted a sharp rebound from last December's historic plunge, expects better manufacturing data will set off a bullish chain reaction.

"Earnings estimates will start to rise, and that could really be the catalyst to create one more nice upward leg in the stock market," he added.

Paulsen is also watching the Labor Department's October employment report, which also comes on Friday. According to Refinitiv, nonfarm payrolls should rise by 75,000 while the unemployment rate ticks up to 3.6% from 3.5%.

"There's a degree of health in this economy which is being covered up by that manufacturing slowdown," said Paulsen, who is tilted bullishly toward cyclicals and international parts of the stock market. "If that changes, there's a lot to like in the rest of the economy."

On Wednesday, the S&P 500 saw its third all-time high in a row and its 15th record close of 2019. The Dow was less than 1 percent from its record high, while the tech-heavy Nasdaq was just a half percent away. The three indexes were lower in Thursday's premarket.


Why Friday's manufacturing data may be the week's most important number