Since March of this year all the stock markets of the world have been in a new bull trend. Even after a gain of 60% from its capitulation low of 666 on the S&P 500, U.S. equities are still reasonably valued and right in the “sweet spot,” the period of strongest appreciation in any bull market. Indeed, history shows that during the first nine to twelve months of a new bull market, the broad market indexes typically achieve from one-half to two-thirds of their ultimate gain over the cycle. The reasons for this are really quite straightforward. Monetary policy has become extremely stimulative, and at the same time, households and businesses are both paying back their borrowings. There is little in the way of private sector demand for credit. Accordingly, the resulting surplus liquidity needs to find a home, and financial assets are always the logical first stop. The second factor is that after a lag of a year or so from the time monetary policy becomes stimulative, the economy bottoms out, and the outlook for economic recovery and ultimately expansion, becomes more clear. This is now happening on a global scale. Indeed, the economies of Europe, Asia and Latin America are already ahead of the U.S. in terms of recovery. This fact is not lost on those of us who have concentrated our equity investments on multinational U.S. corporations as the most efficient way to participate in economic growth abroad, particularly in the major emerging economies. The “sweet spot” is also fueled by massive short covering and the participation of relatively sophisticated day traders.
