As stocks climb higher, extremes in underlying economic fundamentals reflect a galactic separation between the two. Personal consumption expenditure (PCE), fell to 0.5% year over year and 1.0% excluding food and energy while personal income rose by 30%. That difference sent the savings rate through the roof, up 33%.
What if out of concern for their financial security, the US consumer’s savings rate remains high. A US consumer that spares more and spends less is a formula for a lower price to earnings ratio and thus lower stock prices. The savings rate and stock prices have historically been inversely related as reflected in the chart below.
What is this really saying about stock prices?
Investors are fully anticipating a full recuperation in consumption.