Stock Markets: Why The Fireworks?

Today the Dow Jones closed on the highest level since December 2007, continuing the rally which started last June. The German stock index DAX and other European stock markets did the same. Some stocks like Apple, Amazon.com and Google reached recently all-time highs or at least a 52-weeks peaks.

The fireworks on the stock markets seem to be surprising considering all the pessimistic headlines in the media. If we believe Bloomberg and other commentators the rally is only fueled by speculations on more monetary stimulus (including more bond buying by the US Federal Reserve, the so-called QE3).

The monetary policy in the US and in Europe is indeed accommodating because of the extremely low interest rates and the abundant liquidity. But the rally has many more fathers:

Since the start of this bull market in March 2009 the majority has been too pessimistic. The bulk of the small investors (retail investors) has been dumping stocks and many professionals, including fund managers, did the same. Many have been betting on a global economic disaster.

But the world economy is better than the majority thinks and the media want us to believe. Last week we got more evidence that the economic upswing is continuing (ritholtz.com). The US service sector, which contains around two-thirds of the economy, accelerated its growth in August and the US retailers & car producers reported strong sales for the same months. Furthermore, the US housing market is improving and therefore strengthening the economic upswing. Even from ailing Europe came good news. Germany, the leading economy on the old continent, reported rising exports, imports and industrial production for July (reuters).

I reckon that the positive surprises will continue in the coming weeks and months and will fuel further gains on the stock market.