Stock Markets: Comeback Of The Bull?

The U.S. stock market (S&P 500) finished the first half of the year with a meager gain of 8%. I wrote on December 31 2011: "One of the big surprises of 2012 could be a strong rally on the global stock markets with gains of 30% and more, leading the S&P 500 to north of 1.700" (drivebycuriosity). This rally didn`t manifest yet. To reach my year end target the S&P 500 would have to climb around 25% in the second half of the year.

Yes, this is very ambitious. And still, I stick to my year end goal. In the few last months the stock markets were spooked by the European mess, slower growth in China and a sluggish U.S. job market. A very gloomy sentiment spoiled the appetite for risky assets like stocks.

Now the stock markets have priced-in a very pessimistic scenario: A worsening of the global economy, caused by a severe depression in Europe and a hard landing in China. I reckon that the global economy is still better than many think and that the global economic situation will get better in the coming months. My optimism is founded on the strong profit growth of companies, thanks to their rising efficiency, record low interest rates and cheaper commodities.

I expect that China will reaccelerate in the coming months in response to a more accommodative economic policy. I expect further that Europe will start it´s healing process because the economies will begin to adapt to austerity measures. For the U.S. I expect that the job market will recover further because companies should respond to rising profits and tight headcounts. As a response, consumer spending should gather speed again.

A lot of funds are underinvested. Many market participants are betting on a worsening global economy and are sitting on huge amounts of cash and low yield bonds. They could come under performance pressure and return to the stock markets when a better economic climate rekindles the appetite for risk. These factors could work together and the depressed stock markets could respond like a depressed spring when the pressure ceases. Today`s strong half year finish of the stock markets could be the beginning of a powerful rally.