The U.S. stock markets have been strong so far this year, really strong. You might think this would make me happy, but it doesn’t. I’m somewhere between concern and worry.
In my 2012 Year End Review, I said I was cautiously optimistic about 2013. And now after several weeks have passed, I still feel the same way, but more cautious than before.
There are two broad narratives playing out in the financial media: the narratives of the bears versus the bulls.
In the bear case the global economy continues to be sick and is not experiencing healthy broad-based recovery. Debt of all kinds is way too high, jobs being created aren’t high-quality jobs, and the only reason weʼre seeing any growth at all is because of large-scale intervention from the government (mostly the Fed).
On the other hand, the bulls have been stubbornly resilient. Corporate earnings are positive. Weekly jobless claims and the unemployment rate continue to fall.
Persistently low interest rates have been very good for borrowers. Neither bonds nor stocks are wildly overvalued. Things are getting better, slowly but surely.
It’s hard to argue that without the Fed, the market would be in trouble. Take away the easy liquidity, the low interest rates, constant monetary easing, and the economy would really suffer.
But we do have the Fed, and that’s just the point: Bernanke has made it very clear that he’s going to do whatever it takes to support the economy and employment.
And so, if we are relying on the Fed, can they keep up this same pace of assistance forever? Of course the answer is no.
If you think the economy cannot recover in time, then you greatly fear that moment when Fed support comes to an end: a weak economy, on life-support for many years, is primed to collapse when its major benefactor withdraws. The bears do not see a strengthening and robust global economy, so they are understandably fearful.