Equity markets in the United States, with the exception of the sharp correction in February and March, have marched consistently higher since July 2006, breaching record levels. But with a significantly weaker U.S. dollar and slowing economic expansion, the question on the minds of most traders is whether the equity bull market is sustainable or are we approaching the ultimate blow-off top?
"If you look at a long-term chart, the momentum is still upwards," says Michael J. Zarembski, senior analyst for XpressTrade Inc. "There are only three weeks this year that it paid to be short."
But is it greed or fear that is driving equities? Michael Kimbarovsky, principal of Advocate Asset Management LLC, says the bull market is being driven more by a lack of supply than by demand. "It's really supply-based liquidity." He says that fear of not participating in the bull market has drawn cash into the market. "When you add liquidity to any scenario, it's like adding pure oxygen to a fire. Everything will go up," Kimbarovsky says. "The question is: how much is left?"
"I can't find any good reasons to be a bear," says Jason Leander, vice president at Rothschild Investment Corporation. He attributes the strength in equities to three factors: money has been plentiful and liquidity has been high; companies have been sitting on cash and using it to buy back shares removing them from circulation; and private equity is purchasing public companies at a premium, taking entire corporations out of circulation. "All these companies have gone private and you realize: Oh, Jeez, CDW is now private, and you won't be able to buy stock in that company anymore. You used to be able to put your money in and think about retiring, and you are not able to do that anymore."
Another positive factor for the market is that consumer spending, which accounts for more than 60% of the U.S. economy and is correlated to corporate earnings, has not been affected yet by the correction in the housing market and the wreckage of the subprime lending industry.
"It doesn't seem to have any effect on the consumer so far; and as we can see, prices are still moving higher," Zarembski says. "There are other factors at play besides just the U.S. housing market. It is having less effect than it may have in the past."
Zarembski says that money from non-U.S. sources, especially Asia, has flooded the equities market, that business spending is picking up any slack in consumer spending; and that all of this is happening despite increasing bond yields and with the yield curve at its steepest since October 2005. "Usually that would be a competitor," Zarembski says. "When you can get 5.25% on a 30-year bond nearly risk free, you would think stocks would pull back a bit to make that risk a little more palatable to investors, but that doesn't seem to be the case."
"The resilience and strength has been amazing. And intraday volatility has been tremendously high," Kimbarovsky says. But with the S & P up 6.5% year-to-date, compared with energy, which is 16% higher year-to-date, he is less than impressed. "At a macro level, you cannot grow faster than the GDP for any length of time," he says, and people have not incorporated the weakening economy into their investment decisions. He notes that that the current 6% U.S. account deficit and unbalanced budget are a drag on the economy, which posted an anemic 0.7% gross domestic product (GDP) growth in the first quarter. "There is not a lot of room in the U.S. for consistent growth under this macro-economic environment. I don't see a lot of continued upward trajectory in the domestic indexes," Kimbarovsky adds.
He is also leery of an over dependence on consumer spending. "As long as consumer spending is up, which is 60% to 70% of the U.S. economy, it's fine. But consumer spending based on easily available credit is going to stop. …