Market Melt-up

Yesterday, the Fed announced QE3, a new round of “quantitative easing” designed to help the economy.  Many analysts didn’t expect Fed to act before the November elections, so this move was somewhat of surprise.  The markets loved it, and the major indexes, after advancing steadily during summer, are now sitting at nearly five year highs.

Given anemic U.S. economic growth, stubbornly high unemployment, recession in Europe and slowdown in China, is that surprising?  I don’t think so.  Despite the rally, S&P 500 is still 7% below 2007 high, yet company earnings that ultimately drive equity prices, are now 20% higher than they were at the market top.  On a valuation basis, excluding the 2008-09 collapse, equities are at lowest level in twenty years.  Indeed, we had quite a good run this year, but the markets really haven’t moved anywhere (excluding roller-coaster in between) for the last five years.  And going back even further, we are now at the level of 2000, 12 years ago.  So this is all a matter of perspective.

On a CNN Money site yesterday, I saw two headlines right next to each other.  One addressed the market rally, and another stated that investors moved $70 billion out of equity funds in 2012.  A week ago, an article in USA Today pointed out to piles of cash sitting on the sidelines, which was a subject of my previous post.  Of course, there are risks going forward, and a correction here will not be all that surprising.  However, headlines like the ones above give me more confidence in the longer term.  Market tops usually happen when investors move their cash into stock funds, and when your taxi driver asks for stock tips.  We are nowhere near that right now.