After a long period of apparent dislocation, I think the market is now re-tethered to the economy. As such it will rise and fall with the credit/economic/business cycle (all of which have reserves to go higher or improve).
Why?
The negatives and the positives seem pretty evenly balanced. Positives: strong momentum from wealth effect, sense of confidence flowing back into the system, no real signs of overleverage in the system, high earnings level, high profit margins, improving economic indicators (housing, unemployment, PMI, fiscal, output), low inflation, low interest rates, strengthening bank capital, strong credit growth, reasonable valuations, cash on sidelines, no real signs of hubris or greed, still a pessimistic undertone, Fed accomodation, low gas prices, China stabilizing, Japan recovering, Europe recovering. Negatives: political stalemate, above trend profit margins, slowing earnings growth, high earnings expectations next year, growing inequality, market up big, taper not far off, an underlying fragility, corporate leverage increasing, artifice masking underlying weakness, potential reversal of labor/capital trade-off, fiscal exit, stagnation.
The strong move in the market over the past year (with little pullback) indicates a market looking to the future positively.
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