Here is my theory -- don't be shocked, it's nothing new really, just putting some data in context.
My theory is that expectations were low, very low. Lower than reality.
I follow earnings announcements for all reported companies on EarningsWhispers. And I happened to notice that the overwhelming majority of earnings news in the last two months have surprised on the upside (I have not computed a formal metric on this since it would actually involve counting and I'm not in a counting mood right now). My estimate is that at least 80% of companies came out with earnings "above estimate", about another 10-15% were "below estimates" and the rest "inline".
Another way of saying this is that the bad news has been baked into prices for a while -- the stock market being the forward-looking machine it is. And reality wasn't so bad after all. Many market participants are seeing the light at the end of the tunnel.
That doesn't mean we won't have an incoming train at the other end of the tunnel run us over. But it does explain why the market is rallying recently.
Sadly, none of this matters. No one knows what will come next. My best guess is that the two most likely outcomes are:
- This rally will stop very soon and we'll move sideways for a number of years, until inflation catches up with us and eats away the current returns, without many noticing (that's what the government wants to happen so that they get out of their enormous debt by devaluing it).
- The market is now adjusting to the current increased expectations just to be disappointed soon, given that the economy is nowhere near improving. Then the stock market will crash again.
My reaction? I bought some TIPS last week. It's the only true "safe" investment if you earn in dollars and pay your bills in dollars.
But I won't stop there. I'm still planning on what to do next and it might just be "nothing", which is my favorite move most of the time.