Don’t Look Now But . . .

I follow the stock market fairly closely, always have Barron’s on the top of my weekend reading pile, and, as a conservative, incline toward Benjamin Graham-style value investing.  But I never give stock market advice, even when friends ask.  That’s a good way to risk a friendship if they followed your advice and things went sideways.  If I wanted to “invest other people’s money until there’s nothing left” (as Woody Allen put it in one of his long-ago roles), I’d have become a stockbroker.  Hence, I almost never discuss the market here on Power Line.  If nothing else, I figure the SEC has better things to do than determine whether this site should be a registered adviser or something.

So I’ll break this rule slightly right now to say: I hate the current market.  I always hate the stock market when it reaches close to a record high, even though of course you have to reach a record high to break through to new highs, which is the long-term story of the stock market.  I love the kind of market you have in March 2009, when everyone is panicking and you can pick up stocks for a song.  Not for the faint of heart, to be sure.  And especially when you have Obama still finding out how to get to the men’s room in the West Wing.

There are lots of warning flags out right now that the market is overvalued.  The good folks at (annoying registration required), borrowing from the very fine Alhambra Investment Partners, point out some ominous trends in corporate revenues.  In short, revenue growth among the S & P 500 companies has slowed precipitously over the last year.  The first chart shows that McDonald’s sales growth has nearly flatlined (I don’t just love to eat at McDonald’s–I love their stock, too; it has moved very nicely over the last decade):

McDonalds copy

This same shift is seen across the S & P 500:

Alhambra 1 copyThis erosion is actually worse than the run-up to the Great Recession in 2007-2008:

Alhambra 2 copy

What’s going on here?  SeekingAlpha analyst Jeffrey Snider says:

McDonald’s latest results confirm that something is very much amiss on the consumer side. Total global revenue grew only 1% Y/Y, including new store launches and acquisitions. However, as has been the pattern since 2012, U.S. comparable store sales lagged markedly. The rate of contraction in Q1 was actually the worst in more than a decade.

Even if you believe that the cold and snow of January and February played a role, it could not have explained that comparison. There is simply no way that anything other than consumer exhaustion can create the chart above.

This doesn’t necessarily mean the economy is headed toward another recession (auto sales are going strong for now, as are some capital equipment categories), but it likely means the recent bull market is unlikely to continue and economic growth will continue to be pathetic.  Perhaps something worse could happen.  Odds for a continued QE policy from the Fed is likely.

P.S.  I’m keeping my McDonald’s stock.  So should you.  I’m still lovin’ it. I expect they will keep hiking their dividend even if revenue growth remains sluggish.  But S & P put options are starting to look attractive, too.

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