Some optimistic investors argue that stocks can’t be in a bubble because the seven-year rally is “the most hated bull market of all time.”

If that’s the case, then why do people have bubble-like amounts of their wealth in stocks?

That’s the question from David Rosenberg, chief investment strategist at Gluskin Sheff & Associates Inc., after analyzing Federal Reserve data on household assets and liabilities.

“The share of household assets accounted for by equities moved back above 23 percent in the second quarter, higher than it was at the 2007 peak, and topped only by the 2000 tech bubble – and some seven percentage points above the long-run average,” he writes in a Sept. 19 report obtained by Newsmax Finance.

The S&P 500 stock index has more than tripled since bottoming in March 2009 as the global economy recovered from its steepest decline in 80 years. The benchmark has risen 4.9 percent since the beginning of the year. It hit a record of 2,193.81 in mid-August, but slipped 2.4 percent to about 2,141.74 by mid-day Monday.

Weakening Indicators

Rosenberg says the underlying fundamentals of the economy are brushing with signs of a recession.

One worrisome indicator: the Federal Reserve’s “flow of funds” data released on Friday showed that Americans are dipping into savings to maintain their spending levels. The savings rate fell to 9.2 percent in the second quarter from 11.9 percent in the prior period, according to the Fed. Its analysis includes a broader group of assets to measure savings, as opposed to the difference between disposable income and spending.

“If not for that cash-flow impact on spending, real GDP would have contracted 1.2 percent on a year-over-year basis,” Rosenberg says. “It’s looking rather obvious that the U.S. economy is on some pretty thin ice.”

Rosenberg cites several reports that indicate the economy is weak:

• The Federal Reserve Bank of Philadelphia’s “GDPplus” measure slowed to 0.7 percent in the second quarter from 1 percent in the prior three-month period, “pretty well as close to a recession as you can possible get without being in one,” Rosenberg says.
• Nominal gross domestic income rose 2.5 percent from a year earlier, “a trend that actually is below what we saw in nine of the past 10 recessions.”
• Cyclically sensitive GDP (personal consumption expenditure on durable goods and private fixed investment) has contracted three quarters in a row, while the annual trend in the past four quarters plunged to -0.6 percent year-over-year from 6.1 percent. “This is an indicator with an 80 percent track record at predicting recessions,” Rosenberg says.
• U.S. corporate profits shrank by 4.7 percent in the second quarter from the prior year. “The four-quarter trend is -4.9 percent year-over-year and the level of earnings is the same now as it was in 2013 – when the S&P 500 was hovering near 1,700,” Rosenberg writes.
   

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