MarksJarvis: Investors singing a new tune in the new year

Stocks surge on stimulus efforts to revive sluggish global economy

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The stock market has surprised investors with an unusually strong surge, even enticing individuals to throw billions into the stock funds they've feared for years.

But is the enthusiasm for stocks due to an economy that is greatly stronger?

Actually, some analysts say, it's just the opposite. They say the 13.4 percent gain in the Standard & Poor's 500 for 2012 and the 3 percent surge in just the first two weeks of this year come largely from a lackluster global economy.

That might sound crazy. But here's the logic: The Federal Reserve is pumping massive amounts of money into the economy. And the Fed has been joined by its counterparts all over the world, all providing stimulus on their home turf as they deal with recession or sluggish growth. So investors — aware that such stimulus is usually a recipe for stock market bullishness and economic growth — have been jumping into stocks recently. They have been doing it even though economists have been lowering their expectations for the U.S. and European growth for the early part of this year.

"Dr. Strangelove arrives," said Michael Hartnett, the chief global strategist for Bank of America Merrill Lynch, in a report about the latest infatuation with stocks. "We believe a bearish macro backdrop is more likely to cause higher, rather than lower, asset prices in 2013."

In other words, the theme playing out for 2013 is: "I'm so bearish, I'm bullish."

Hartnett points to Japan to illustrate. Japan's economy has had three recessions in five years, and corporate earnings have been disappointing. Yet, the "deeply bearish consensus" caused investors to ignore all that and buy Japanese stocks on the expectation that a new stimulus program would help.

In Europe, too, Hartnett notes, investors looked past the recession as "policymakers once again successfully tranquilized investor concerns with promises of liquidity."

In the U.S., the economy is recovering, although at less than half the pace of a usual recovery. Yet with home prices up 6.3 percent, bank lending picking up and unemployment down to a still-high 7.8 percent, Hartnett says investors are betting "that the unprecedented policy (stimulus by the Fed) of recent years is finally gaining traction."

If the economy continues to stay weak enough to keep the Fed stimulating, he says, the combination of stimulus plus a modest recovery should help stocks continue to climb.

Economic data Tuesday continued to send mixed messages. Retail sales for December were stronger than expected. But the Empire State Manufacturing Survey was weaker than expected. Analysts say the industrial sector has been held back by reduced foreign demand and concerns in the U.S. about the "fiscal cliff" in December. Those concerns could re-emerge as Capitol Hill confronts the debt ceiling as early as mid-February.

Some analysts also see some early signs of a herd mentality in the stock market that could continue to lift stocks for awhile.

Last year, there was no reward for hedge funds and mutual funds that invested cautiously based on concerns about Europe's debt crisis or a slowdown in the Chinese economy. Their performance lagged far behind the stock market's gain, and many will feel compelled to try to catch up so they don't lose disappointed investors, said JPMorgan Chase & Co. strategist Thomas Lee.

Only 5 percent of large-cap managers and value managers beat the Russell 1000 value index by 2.5 percentage points, and half produced returns that were 2.5 percentage points below the index, Lee said. So he assumes the managers will buy and keep stocks climbing for "the next few weeks."

Momentum also may be coming from individual investors with regrets about missing last year's 13.4 percent gain in the stock market.

After pulling $23 billion out of stock funds and pouring $680 billion into bond mutual funds and exchange-traded funds in 2012, they showed a change of heart this year, pouring $18 billion into stock funds in one week.

The "sudden surge in equity fund inflows, which seem incongruous with lukewarm incoming data, may well come from investors who missed last year's stock market rally," said Jan Loey, who heads JPMorgan global asset allocation.

"Near-term momentum remains good for stocks," he said. "At the same time, the more bullish sentiment on stocks is now sending a contrarian signal."

In other words, the gains of the past year are going to be harder to replicate.

Last year's surge, he noted, came largely because concerns were lifted after tremendous worries. "This does not appear to be the case anymore, as the main remaining market concern is only about 'fiscal cliff 2,'" he said. "There is no more talk of a Chinese hard landing or a Greek exit (from the euro)."

Unless the economy or earnings grow more than expected, investors probably won't see a big pop.

gmarksjarvis@tribune.com

Twitter @gailmarksjarvis

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