The more I analyze this market, the more I believe the song remains the same. Valuations remain elevated (see charts below) and, from a technical perspective, today's negative action is another indication that there seems to be resistance in the DJIA/S&P 500/Nasdaq Composite at the 18,000/2,100/5,000 levels.
But the biggest risk now facing investors is this: When a market is priced for perfection, imperfect company performances are punished.
Last week, we saw at least three examples. LinkedIn (LNKD), Twitter (TWTR) and Yelp (YELP) all plunged massively -- at least 20% -- after earnings/outlooks that failed to meet Street expectations.
We should all be familiar with this scenario from the early 2000s, but in case you forgot, stocks that are trading at astronomical multiples have elevated risks of blow-ups.
So, be careful out there!
Far be it from me to say anything positive about the U.S. economy. There was one silver lining in the otherwise depressing first-quarter GDP report (U.S. GDP grew at a whopping 0.2%). The "guts" of the Commerce Department's GDP figures are always more useful than the headline figure, and a number that caught my eye this time was real disposable personal income (DPI).
When I followed autos for DLJ many moons ago, I built a model to predict U.S. auto sales. Running all the correlations showed clearly that real DPI was the largest determinant of auto sales. Not interest rates, used-car prices, unemployment rates or any of the other factors often cited when monthly sales figures are released, but "real dippy," as we called it.
Real DPI grew 6.2% in the first quarter, a strong pickup from the fourth quarter's clip. While individual readings are notoriously volatile -- the fourth quarter of 2012 showed an 11.8% gain in DPI and the first quarter of 2013 showed a 12.6% decline -- the trend is clearly toward a U.S. consumer with more purchasing power.
Another old metric in auto analysis was "ability and willingness." Clearly the first quarter's real DPI showed the consumer was more able to spend, but the same report showed anemic growth in personal consumption expenditures -- 1.3%, which absolutely restrained the overall GDP figure. Clearly, the consumer's willingness to spend was just not there.
I don't think a higher personal savings rate is a bad thing, quite the opposite really, but that has not been a sustainable trend, especially with interest rates so low for so long.
Many observers are counting on the consumer to accelerate this frustratingly slow recovery, but I am not yet convinced. The lack of wage growth remains the limiting factor, and April's jobs number weren't encouraging from the top-down perspective.
But the strong real DPI figure in the otherwise tepid GDP number may have been a canary in the coalmine. So I'll keep watching the consumer names with an eye toward rotating into that sector in the second half of 2015.
