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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