Binging on the Stock MarketOctober 22, 2012 Posted by: Joe Morgan, CFA
Welcome to the jungle
We got fun n' games
We got everything you want
Honey, we know the names
We are the people that can find
Whatever you may need
If you got the money, honey
We got your disease
- Guns N Roses
For the 26 th and 27 th time last weeksomething thrilling happened. No, it wasn't U.S.Men's NationalSoccer Team's takeover of the top spot in CONCACAF to qualify forthe 2010 World Cup, and it wasn't Bank of America CEO Ken Lewis'"generosity" of returning seven figures of compensation. It was theDow crossing 10,000 - to the upside. So why does bashing thispsychological barrier bring about such positive feelings this timearound?
To be sure, a stock market that's up 23 percent year-to-date andsome 63 percent from the bottom on March 9, 2009 is a welcomesight. But there are many reasons to believe the stock market'snewfound mojo is not only justified, but can continue into the nearfuture.
First, it seems clear the economy has hit bottom, so there isnowhere to go but up. The world's most optimistic discounter offuture events has always been the stock market and there's noreason to believe that has changed. If there is a fairly quickturnaround in the economy (or even just slightly quicker than thesluggishness built into the markets), then stocks still look quitecheap.
Second, for those who traded out of the risk markets last year andcourted shoulder injury patting themselves on the back through theholiday cocktail party season, there have been some tremendousgains recently which could temper this year's attempts atbraggadocio among the canap's. Better to get in before All Hallow'sEve to have some (positive) war stories for this year's gatherings.
Third, and most important in my opinion, is simply the tremendousamount of cash sitting on the sidelines, itching to get back towork. In particular, there is about $1.4 trillion in "extra" cashsitting in money market mutual funds earning next to nothing that"should" be invested in the risk markets in the face of risingmarkets and rising, but now historical, returns. This is akin tothe brownie stash I keep in the pantry...Read More