I’m amazed at the resilience of the stock market today and a lot of factors have come together to create the positive environment we’re now enjoying. Late last year, the stock market was stuck in a cycle of negative investor sentiment surrounding the sovereign debt problems in the eurozone. At the beginning of 2012, it was as if all these problems just went away. Of course they didn’t, but investor sentiment turned for the simple reason that the market place was tired of worrying about the issue. (See Investor Sentiment: Strong Enough to Carry the Stock Market Higher.)
None of the investment risk regarding Greece’s sovereign debt problems has gone away. You can’t fix a debt problem by adding more debt to the situation. The problem is only being sugarcoated right now and it likely will come back to haunt capital markets. But it isn’t likely to do so this year, because it’s an election year in a lot of countries and the powers that be want everything to be as rosy as possible.
We’ve seen a lot of this from the Federal Reserve, which could not be more accommodative to the stock market, and Wall Street, for that matter. Ben Bernanke’s unprecedented interest rate statement (about low rates for a long time) also helped turn investor sentiment positive. It was a brilliant choice of words and timing, for better or worse. The result has been a strong stock market since the beginning of the year.
While economic news has not been uniform, we have been getting improved data lately and this is helping investor sentiment stay positive. Private sector employment growth has buoyed investor sentiment along with the big improvement in retail sales. There has been real strength in the retail sector lately and we saw this in last quarter’s earnings result. I’ll bet the first quarter will also be a good one for retail and that this stock market sector will keep ticking higher.
With the S&P 500 Index over 1,350, the stock market is in a good position this year. The NASDAQ has broken the 3,000 level and has provided real leadership so far this year. This is good confirmation for the rest of the stock market. Investor sentiment will soon be on hold until first-quarter earnings season begins and, if the numbers come in decent (most particularly corporate visibility), then we could tack on another 10% in total stock market returns this year.
I still feel that the broader market is in the process of topping out and will likely do so this year or early next. What are required now are continued baby steps in the right direction in regards to economic news and earnings, in order to keep investor sentiment positive. The stock market’s near-term trading action looks quite positive.