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Weak recovery = strong stock gains?

According to columnist Jon Markman, up is down and down is up:

Investors who are worried that the economy won't advance fast enough or far enough to justify a 15% rise in the stock market this year have it all wrong. Stocks have actually been rising because the coming recovery from last year's wipeout is expected to be slow and weak, rather than fast and furious.

If that seems backwards to you, I encourage you to read his full explanation. In a nutshell, he argues that corporate earnings and global economic growth aren't the primary market movers over the short term. Instead, interest rates, inflation, and sentiment are the keys, with government policy also playing an important role. When those factors align as they have, and continue to, the market can advance much faster and further than most expect, even in the face of a sluggish economic recovery.

Because the economic recovery continues to be so tepid, Markman thinks the market could stay in this "sweet spot" for some time yet. Quoting from another article he wrote recently:

Every time that a 12-month-average buy signal has been given after a bear market of a year or more, the ensuing up move has itself lasted at least a year — and more often three or four.

The primary reason: The government and central bank response to a calamity like the Lehman Bros. collapse and panic is typically so powerful and over the top that the monetary infusion cycle — fiscal stimulus and superlow interest rates — that ensues is much more persistent than anyone expects.

Perma-bull? Hardly. Unrealistic stock promoter? I don't think so. Markman actually believes we're in a secular bear market — have been for almost 10 years now. But within that long-term bear market, he says we should continue to expect big cycles. 2000-2002 was a big bearish cycle, followed by the 2003-2007 bullish cycle. We had a huge bearish move over the next 18 months, and now he thinks we're primed for another significant leg up, much more significant than most are allowing for.

And he thinks the very fact that many investors are having so much trouble accepting that possibility makes it that much more likely to happen. Bull markets love to climb a wall of worry, and there's plenty of worry still out there to climb. Read his full article(s) and see what you think.

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