Decoupling of Stock Market & Economy
The recent stock market rally signals a decoupling between the stock market and the economy. The economy, given its current state, would have a L-shaped recovery at best. As the consumers facing terrible job market, and high debt levels for households and government remains if not worsen, the economy powered by consumption is not likely to have a robust recovery.
On the other hand, aggressive cost cutting has fueled a recovery in corporate profit. However, sales trend still remains weak. With the decline of the dollar, I expect U.S. exports to recover as foreign countries start buying up electronics, IT and capital-goods. Foreign consumption would be the fuel for sales recovery for American companies. Therefore, companies that sells to foreign markets would see a healthy recovery while others would continue to face a tough market. The sales boost from foreign consumption would further increase profitability, and cause positive earning surprises which drives up market.
Another source of divergence between stock market and the real economy is inflation scare. With the government printing so much money, and skyrocketing budget and trade deficit over the years, it is hard to be bullish in the currency. The prospect of currency devaluation is enough to drive a lot of investors out of bonds and cash and into equity markets.
Therefore, while the real economy is struggling, the stock market might perform surprisingly well.