Bear Warning

Said one of those skeptical guys,
As the market was hitting new highs:
"The bulls may suppose
The economy grows,
But I doubt that the latter complies."

On Friday, the S&P 500 closed above 1,600, while the Dow Jones Industrial Average traded above 15,000 for the first time ever.  Many stocks are at or near their 52-week highs.  With the US stock market showing record-breaking growth, it may be fair to ask: why isn't the US economy doing the same?  Oh sure, we are in a recovery, and the unemployment rate is falling, but with GDP growing at only 2.5% per year and the jobless rate still at 7.5%, it's all happening too slowly.  As The New York Times Strategies column pointed out this past weekend, American companies have been able to reap handsome profits in spite of the lackluster economy, in part by controlling costs, i.e., not hiring too much.  Thanks to the Fed, they can also borrow at record-low rates, which enables some financial profits.  But is it all - to use an overused word - "sustainable"?

At least one market strategist quoted in the Times column is concerned about a lack of meaningful sales growth: "Weak sales could presage a drop in profit margins, he said. And if profit margins decline sharply — by about 10 percent or so — history suggests that it’s time to say goodbye to the bull market."