Good Morning. Investors dressed in fur these days have likely been
both surprised and dismayed by the S&P 500's recent 6-week joyride
to the upside. For those keeping score at home, the venerable stock
market index has now finished higher in 7 of the last 9 weeks. Since the
most recent uptrend began on December 20th, the S&P 500 is up 9.2%.
And since the crisis low of October 3rd, the market is up an impressive
+19.75% as of Friday's close. Not bad for a market where the sky was
supposed to be falling!
In speaking with a colleague recently, a colleague who is most
definitely not a supporter of the bull camp these days, I was challenged
to produce the drivers of the bulls' recent run for the roses. And as
my friend quickly pointed out, "just because" is not an answer. I
responded that since the primary objective of my Daily State of the
Markets report is to identify the drivers of the market action, he might
want to read this morning's missive.
So here goes. In short, I believe there are four drivers to the stock
market's jaunt higher over the past four months. First, there is
Europe. Next, there are the valuations in the market. Third is the
concept of asset allocation (the U.S. is currently seen as the best
house in a bad neighborhood). And finally, there is the idea that the
U.S. economy seems to be doing better than anybody expected it to.
As a matter of explanation, let's briefly review these one at a time -
and from the perspective of those who see the market's glass as at
least half full, of course. But to be clear, I am not a raging bull. Nor
am I a "nattering nabob of negativity." No, I believe it is important
to be able to understand and appreciate both sides of any argument in
the stock market.
So let's get started. Given that Europe was the primary driver of the
market's dance to the downside, it only makes sense that the sovereign
debt crisis suddenly and without warning stopped being a bear's best
friend. From my perch, stocks were decimated during the
late-summer/early fall period due to the fear that a messy default in
Greece would throw the global banking system into disarray. However,
with the ECB's LTRO injecting massive amounts of liquidity into the
Eurozone banking system, it appears that there isn't going to be the
much-feared "Lehman moment" across the pond.
Before I get peppered with objections and hate emails, tweets, IM's
and FB messages, let me make it clear that Europe has BIG problems that
may last a very long time. To be sure, many of Europe's economies are
heading for a very long, very difficult period from an economic
standpoint. However, unless these problems start to worsen in dramatic
fashion, it appears that the funeral for the global banking system has
been called off.
Next up on the bull's hit parade is the subject of market valuations.
Let's take a look at this subject from a big-picture standpoint.