Disposable income, savings, net worth and consumer confidence have been declining over the past year. Indebtedness as a percentage of disposable income, at 120 percent, is a fraction off its all-time high. There have only been three occasions in the past 35 years when consumer credit was growing at the same time consumer confidence was falling. Of those three occasions, consumer spending fell sharply twice. The one occasion when consumer spending did not decline, 1977-78, real income growth rose steadily over time.
Employment tends to have a major impact on real disposable income growth.
Another round of corporate layoffs could be the catalyst that takes the consumer into hibernation. There are many valid reasons for the market to trade at a higher multiple, but 34 percent higher seems a little rich considering that markets tend to trade at the lower end of their historic range during bear markets. At present valuations, I don't see much further multiple expansion. History has shown over the past century that it usually takes two years for the bubble bursting to run its course. Given the Fed's intermeeting rate cut, I believe the Fed fears the recovery is in jeopardy.