Everyone is yelling “the recession is over”. The stock market has risen close to 50% since its march low. Lets examine the forces that might influence future markets:
- For individuals and fund managers who missed the recent rally. There are intense pressure to get back into the market. With talks of recovery everywhere, the baby boomers who lost 30-50% of their retirement portfolio are really anxious to get back into the market.
- Cost cutting + increasing productivity + sales recovery might push companies that have heavy international market exposures to produce positive earning surprises. The recovery in emerging markets are pretty evident. With the dollar staying weak, multi-national companies can rake in handsome sales overseas.
- Government Spending, Stimulus programs, and loose monetary policies would inject money into the economy, causing asset prices to inflate. The prospect of recovery and inflation would cause stocks to be more attractive then bonds.
- The short term market is very over-bought. And profit taking is inevitable. For those who are lucky to gain from the rally, it would be tempting to lock in the profits. The current price level is pricing in a $75 earning for the S&P, which is almost impossible consider that the peak earning in 2007 is $85, with almost half of it from the financial sector.
- The economic system is not cleaned. It is actually gotten worse due to poor government policies. Household deleveraging has not happened, and with the cash-for-clunkers program, people are accumulating more debt. Therefore, the rosy sentiment that “good days are back” are not backed by fundamental improvements in the economy. Such positive sentiment might mark the top of the “recovery” bear rally.