Investors were inundated with headlines over the weekend on the Dow Jones Industrial Average rising above 14,000 for the first time since the financial crisis.
Some respected investors say this is just a warm-up as U.S. stocks prepare to make all-time highs while so-called tail risks diminish. Yet it’s hard to ignore the steady drumbeat of bears who point out the world’s problems are far from fixed.
Individual investors are growing more bullish on the market. For example, inflows to equity mutual funds and ETFs hit a record of $77.4 billion last month, Barron’s reports. [Stock Funds and ETFs See Highest Inflow Since 1996]
Since Jan. 1, the S&P 500 has gained about 6%, says David Kelly, chief global strategist at JP Morgan Funds. Global stock markets have also risen while U.S. Treasury yields have drifted higher.
Kelly explains the forces driving the rally in a note Monday:
2013, so far, has been a “risk-on” year. It is, of course, very difficult to predict how long this trend will last. A good place to start, however, is in understanding what has been behind the rally so far.
This is not a rally driven by economic momentum. The U.S. saw real GDP growth turn negative in the fourth quarter of 2012, and while that number overstates economic weakness there is little reason to expect a sharp bounce in output in early 2013, particularly because of the fiscal drag implied by the New Year’s Day compromise in Congress.