A big-picture overview of the market and economy (part 1)

Longtime readers know that I'm a bottoms-up stock picker...

I don't spend a lot of time trying to predict macro factors like GDP growth and the Federal Reserve's next move. I focus the vast majority of my energy on researching companies, industries, and trends.

And I try to make sure I don't develop an unwarranted doom-and-gloom outlook, fueled by the ever-present perma-bears, which might lead me to sell good stocks way too early.

That said, once every five or 10 years, the stock market becomes so disconnected from reality – rising to new highs while the fundamentals deteriorate – that it makes sense to trim the sails and batten down the hatches.

Some are claiming that now is such a time. So let's take a look at their arguments...

They're undoubtedly correct that valuations are high. This chart from yesterday's e-mail shows that the S&P 500 Index is trading at a historically high price-to-earnings (P/E) ratio:

And it's not just P/E... In fact, on any valuation multiple, the S&P 500 is trading close to all-time-high levels, as you can see in this chart from the research house and brokerage Strategas Partners Research, which I saw republished in a Wall Street Journal newsletter by Jason Zweig:

According to the latest Investors Intelligence survey, bullish sentiment (a contrarian indicator) is currently at one of its highest historical levels. As you can see in this chart, courtesy of Charlie Bilello's Week in Charts, bullishness is up to 63%:

Is the economy doing well enough to support such high valuations and widespread bullishness?

To try and answer that question, let's review some macro factors...

Year-over-year quarterly GDP growth is slowing a bit, but solid:

It's the same story for consumer spending, which accounts for roughly 70% of our economy:

But when you zoom in, there have been increasing signs over the past few months that the economy is weakening...

Let's start with GDP growth. The Atlanta Fed recently halved its growth expectations for the second quarter, as Bilello notes:

The Atlanta Fed is now projecting 1.5% for real GDP in the 2nd quarter, down from 3% just a few weeks ago.

While still low by historical standards, the unemployment rate has ticked up to 4.1% – the highest level in nearly three years:

This chart from Renaissance Macro Research shows how nonfarm payroll growth has been slowing since the beginning of 2022, leading to the uptick in the unemployment rate over the past two years:

To be clear, payrolls are still growing... but the rate of growth is slowing, as this chart from Bilello shows:

In Monday's e-mail, I'll continue my analysis with a look at how the slowing economy is affecting consumers and the impact on manufacturing and services. Then, I'll conclude with my outlook for investors.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.