Last week, stocks eked out a meager gain. Still, it was the fourth straight week equities tread higher. With the Dow having risen on 16 of the last 20 trading days. Why? Strong economic data and excellent corporate earnings. Leading S&P 500 companies to report likely aggregate Q3 earnings growth of 8 percent.
Should be cause for jubilation. Yet, investors continue to find plenty to worry about. Our team, however, believes there is a strong case justifying a continuation in this bull market.
First, global central banks remain highly accommodative. Europe is easing into the easing game. The U.S. will likely hold interest rates at 0 - 0.25 percent for the next year. Japan will maintain a low interest rate policy for the foreseeable future.

Moreover, the Pension Fund of Japan has determined to elevate its stock allocation, both domestically and foreign. By selling Japanese Government Bonds (JGBs) and buying domestic and foreign stocks, global equities will have yet another rising tide beneath them. In fact, between this and the government's quantitative easing efforts, Japan has in effect launched the most massive easing program of all time. Ultimately, this will hugely impact U.S. and eurozone markets.
Some equity strategists believe the program could help to lift the S&P 500 by as much as 25 percent next year. Equating to 2,500 or higher. Such a rising tide could trigger the final requirement needed to push this bull market higher: the participation of Main Street investors, most of whom remain on the sidelines.
For six years we've enjoyed the most hated of all bull markets. Even amid the outlandish annualized returns, investors remain skeptical. Believing the bull's demise resides around every corner. Which is positive us.
According to Dalbar, the S&P 500 achieved an annualized return of 9.3 percent during the 20-year period from 1993 to 2013. Simultaneously, average investors made 2.5 percent. In other words, the average investor missed out on nearly 75 percent of market returns over those two decades. Why?
Largely because the skills required for effective investing are not part of our DNA. Causing investors to do the wrong thing at the wrong time. Even today, as the S&P 500 has provided a better-than-15-percent annualized rate of return for five years, Main Street investors remain on the sidelines.
Eventually, average investors will begin to believe. Will buy into the market. So providing stocks with yet another power source by which to achieve new highs.
Further underscoring our bullish sentiments have been the recent M&A activity. Last week saw two deals of $20 billion or more. The first time since 1998 that two deals of that magnitude have occurred within the same week. Thus far, 2014 has seen 11 corporate takeovers valued at more than $20 billion. Making this year the busiest for M&A activity since 2007.
Of course, you recognize how these deals are positive for global equity markets. Investors who owned stock in a company being acquired make a quick profit, but may not wish to double up on shares of the acquirer. So, they put their gains to work elsewhere. Investing into a market that now has fewer stocks. That lower supply of investment possibilities equates to higher demand for fewer shares. Which, of course, leads to higher prices.
Summing up? Enormous liquidity flows from central banks, benign inflation, increasing investor demand amid fewer stocks from which to choose should push markets higher. Though, this will not happen in a straight line. Stocks are momentarily overbought. We believe that the S&P 500 could pull back to the 2,000 level over the next two weeks. Pausing temporarily, before leaping higher and providing a much-anticipated Santa Clause rally to end the year.
The Good
The unemployment quit rate has increased dramatically -- reflecting increasing confidence in the labor market (see this)... The market's technical setup increasingly portends a year-end rally... Keystone Pipeline appears to be on track for Congressional approval... Michigan Consumer Confidence set a new recent high... Small business optimism is rising...
The Bad
Fighting resumed in Ukraine... U.S. rail traffic appears to be slowing... Initial jobless claims increased...
The Ugly
Immediately following the midterm elections, both parties spoke of diplomacy and mutual interests. Mitch McConnell said there would be no government shutdown. President Obama said he would seek Congressional consensus. Yet, two week later, the buffoonery is back.
Political rhetoric is rapidly intensifying as the president threatens unilateral action on immigration and Congress responds by threatening a government budget shutdown. Talk about short-term memory. How can anyone conclude that the system isn't broken?
Not Putin on the Ritz
Last week's G20 summit in Australia transpired without much legislative fanfare. But, aside from a lack of dynamic policy and procedure, the interpersonal dynamics were riveting.
Vladimir Putin, Russia's enigmatic strong man, was treated like a high school freshman who went up the wrong staircase. I'm surprised the coterie of western world leaders did not stuff him in a locker.
Putin was treated poorly. Mocked by David Cameron. Cajoled by Stephen Harper. Slighted by Barack Obama. Only the host, Australian PM Tony Abbott, treated Putin with any real dignity. So harried was Putin that he feigned an excuse to leave the Summit early.
Sophomoric on the part of western leaders? Yes. Worse, however, is the fact that as Russia's economy worsens, these diplomatic buffoons just handed Putin political cover at home for his failing domestic policies... "See how the west hates us? Wants to hold us down?" Due to the lack of western political tact, Putin's popularity numbers will likely rise just when western sanctions should be dragging them down.
Understanding and Overcoming America's Plutocracy.
True, the recent election deposed a number of unaccomplished, self-serving political fief's. Do not be fooled, however, into thinking that it did a thing to solve the nation's entrenched two-party corporate oligarchy. A system whereby corporations, lobbyists, Democrats and Republicans collect the dough and run the show. Behold your American Plutocracy... Article.
Can Money Buy Happiness? Here's What Science Has to Say.
Think more money would make you happy? Perhaps. But not in the way you might think. The acquisition of material possessions does little to make us any happier. But, different experiences, be they vacations, activities or time with friends and loved ones? Could be the key to happiness. Read this.
How Pensions Make Investing Too Complex.
Large public pensions have bedded down with hedge funds and other complex investment platforms in order to enhance returns and lower volatility. Problem is, it hasn't done the trick. Pensions have under performed while being overcharged. And the investment relationships with these complex fund managers are so opaque that the pension trustees and their constituents rarely know what they've invested in. Read more.
How to Distort Income Inequality.
The Piketty-Saez data and book brought the income inequality argument to a crescendo. But, was the data exaggerating the outcomes by not accounting for crucial income inputs? Article here.
What the Stock Market Can Teach Us About Ourselves.
Professional stock investors can teach us a lot about ourselves. Money brings out the insecurity, fear and irrational behavior that we might otherwise keep hidden. Investing is not just a test of strategy, but one of character. And what we do when investing often reveals a lot about how we view ourselves. Article.
Landing on a Comet, 317 Million Miles from Home.
Sometimes, amid the wars, economic imbalances, poverty and politics, it's easy to lose a bit of faith. Then, someone pulls off something spectacular. Like landing a man-made spacecraft on a comet flying through space at 42,000 miles per hour. Enjoy these lovely photographs.
Weekly Results
Major markets finished higher last week. The DJIA rose 0.35%, the S&P 500 gained 0.39%, and the Nasdaq advanced 1.21%. Small cap stocks declined 0.06%. And the 10-year Treasury bond yield fell 22 basis points to 2.36%. Gold rose $11.03 per ounce, or 0.94%.
Check out JP Morgan's weekly recap here.