March 12: Outlook for Domestic Economy Improved - Economic Highlights

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The S&P 500, the broadest index of large-capitalization stocks, is about to follow the Dow Jones Industrial Average into record territory. Other indexes tracking smaller and mid-cap stocks have been in record territory already. While the momentum is most pronounced in stocks, other asset classes have been active gainers as well. Outside of gold, most commodities are doing great and yields on treasury and corporate fixed income instruments are at historically low levels. And measures of volatility have fallen to levels prior to the Great Recession.

Why are investors in such a cheery mood?

The 'bulls' claim, with some justification, that the outlook for the global economy has improved over the last few months. The 'hard-landing scenario' for the Chinese economy is off the table now and, notwithstanding the split mandate in the recent Italian election, the outlook for Europe appears to be less worrisome. Even the long moribund Japanese economy is showing signs of life. But most importantly on the economic front, the outlook for the U.S. economy has improved. Housing is in a recovery mode and jobs are coming back, helping household spending to hold up. And the corporate sector is in excellent shape and extremely profitable.


But many of us are not convinced that the aforementioned positives justify the market's current levels. We wouldn't be where we are in the market if the Fed wasn't pumping trillions of dollars into the economy. The Fed's balance sheet has increased from less than $1 trillion before the Great Recession to over $3 trillion now and on course to reach $4 trillion by the end of this year.

Investors are looking for a ramp up in economic growth and in the second half of the year, even though similar expectations in the last two years didn't pan out. Corporate earnings have been great in this recovery, but that is now firmly in the rearview mirror. Objective conditions for double-digit earnings growth in the back half of this year and next year as current expectations reflect are simply not there. The most likely scenario on the earnings front is that they remain flat relative to what we got in 2012.

These are not the building blocks from which record market levels are made. But that's where we are at present priced for perfection. So, is the all-around exuberance justified? You know where I stand in this debate, but who has time for these pesky arguments at a time of party and celebration. It's not possible to fight the Fed. So we all may as well join the party and celebrate.

The Treasury Budget is scheduled for release today at 2:00 PM EST, with an anticipated deficit of $213.3 billion, following the reported $2.88 billion deficit in January.



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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Economy

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