Monday, February 13, 2012

Sentiment is Changing

It's interesting how much people's views of the market's future is so dependent upon its recent past. There is not much new in fundamental news from last summer until today, but the stock market is up nearly twenty percent over that period and you can see the shift in sentiment that has taken place. People now see less risk in the stock market and better prospects for higher prices than last summer when prices were much lower.

So, what's new (other than higher stock prices). Europe is in worse shape than last summer. The US fiscal situation continues to deteriorate and the political environment has become even more toxic. The future of the bond markets looks worse than ever. There is a threat of war in the air in the Middle East. Unemployment is still above eight percent and employment growth is still the slowest on record for an economic recovery.

But, prices are higher, so everyone extrapolates.

My guess is that stocks will continue to go higher. Stocks are still cheap, but not as cheap as they were. I expect 2012 to produce US stock returns in excess of twenty percent, but we shall see. The smart money is still bearish.

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