Economic Data Show Potential Of Stock Market Bubble

 |  Includes: DIA, FXE, FXY, SPY, UUP
by: Doug Eberhardt

The DOW (NYSEARCA:DIA) and S&P (NYSEARCA:SPY) are breaking new records, yet the underlying data doesn't support such valuation in the markets. What does the underlying data really say about the economy, and what effect might this have on stock markets moving forward?

The U.S. Treasury just came out with their monthly and quarterly economic statistics and data, as shown in the following two tables. A synopsis shows a rising trade balance for goods and services and a decline in industrial production since 2010, a decrease in Real GDP since 2010 and a declining personal savings rate. None of the first three -- trade imbalance, decline in production, and decrease in GDP -- are good for the economy. But savers may indeed be pulling money out to invest in stocks in search of a better return, as interest rates have fallen considerably due to Federal Reserve interference in trying to maintain price stability and reduce unemployment.

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It is this move from savings to stocks that has possibly contributed to a higher stock market. But the economic data doesn't support it. This, by definition, is a bubble.

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DoubleLine Capital's Jeff Gundlach said Thursday on CNBC;

It (QE) creates a low basis of comparison that is keeping the trend toward being anything with a yield on it as being successful investment that will continue to, I think, appreciate in value and lead to even more of a conundrum for investors in terms of what they're supposed to do going forward. But it can't last forever.

While investors in general shouldn't fight the trend, one can take profit. No one goes broke taking profit.

Dead Sea Stocks

To further analyze where we are now, the Baltic Dry Index has moved up from the low 700 level to the 870 level, leading some to think an economic recovery is underway. But looking at the second chart below, you'll see how the Index and the S&P have moved together over the years and just how far apart they are today. Is this sustainable? Will activity all of a sudden appear to match the S&P Index, or will the S&P Index fall to match activity?

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Declining GDP and Stock Return Expectations

Ed Easterling, author of the book "Unexpected Returns", shows in the following chart that slower growth lowers the P/E ratio.

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Easterling created the following chart in March showing how far this latest move in the stock market has been.

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With the DOW (DIA) now over 15,000, one has to realize that sure, while the stock markets can move higher, what is the risk vs. reward that you can expect to receive by holding onto stocks that have just gained over 123% from their lows? The data presented above might convince some it's time to take at least some profit off the table.

Actionable Advice

If one is looking for a place to park funds for the time being, look no further than the U.S. dollar (NYSEARCA:UUP), which had a nice bounce today. I see further strength in the dollar ahead despite all the negative economic data outlined above. Why am I dollar bullish? Because the euro (NYSEARCA:FXE) and yen (NYSEARCA:FXY), which make up 70% of the Dollar Index, are in much worse shape than the U.S. In fact, while it is a race to the bottom for all currencies, with leaders wanting to make their countries' products cheaper and thus increase their own GDP, perception is what makes U.S. Treasuries and the U.S. dollar so strong. People simply believe all is well in the good old USA. I'm not one to bash the American spirit, but I am one to point out the data as I see it. Cash is king for now, as we wait patiently for other opportunities.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.