It starts as a blip, then it becomes a bounce, then a rally, then a new high, then a brand new leg for an old bull market. The perma-bears are bold for a group that has given so much bad advice over the last five years, (as I pointed out on Tuesday) and they only become more so as the bull market goes on. Why? Well, the brain is, among other things, a pattern recognition tool, and when the stock market goes up for six years in a row, it appears to be breaking the pattern.
The problem is that patterns only appear in retrospect in chaotic systems, and even then, they are non-predictive. The market won't fall merely because pundits think that the time has come for it to do so – it will only fall when there is a sustained net outflow of money from the market, and there is no reason to think there will be anytime soon, since money still has few attractive options. The possibility of a longer period of low interest rates caused a brief window of light in the bond market this week, but it was very quickly filled in and yields are already on their way back up.
Also, stocks just aren't overvalued. Even during today's monster rally (the S&P 500 is up 1.7%), the average P/E of S&P 500 companies is 18.3. We are a long way, now, from the 22.5 to 25 level where the trouble really starts. Earnings growth need only continue slowly for stocks to keep rising.
But will they? The answer is yes, though slow growth may become uncomfortably slow in the fourth quarter. I say this because of the problem of lingering wage stagnation. In the broader sense, though, the wage stagnation issue shows that our economy is still taking up slack, and that's a good sign, as it means sustained growth is still possible.
Bulls won this round simply because Q3 earnings are coming in well. To win the next round, companies are going to have to start spending their profits on their employees and not their own shares. There is hope, with declining unemployment, that the magic of the marketplace will force them to do this, and that's good, because there seems to be little hope they will do it if they can possibly avoid it.
Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.