There seems to be a sense of calm in the financial markets these days. An eerie calm that makes one wonder what lies inside investors' heads. And usually times like these - times when the market is consolidating - they suggest that the market may have reached a fork in the road.
Is it time to exit stage left while the going is still going or just to keep on going in anticipation of picking even greater fortune?
Can't blame those thinking of exiting the market for shares now and protecting what they've accumulated to date. The S&P 500 has, for instance, appreciated by 11.6% heading into the three-month mark of the year 2012. How good is that? That's heaps better than the current 0% Americans can get on cash or the 2.3% yield offered by 10-year Treasuries.
While the bugbear that is Europe is seemingly at peace now after Greece got its second bailout, there's still Murphy's Law to worry about.
Just last night, German Chancellor Angela Merkel reminded us of this, declaring that the relative calm over the sovereign debt crisis was just a "phase". "Concerning the development of the crisis, we cannot say today that it is over, we still find ourselves in one of the various phases of the crisis."
And then there's Mr. Willem Buiter - Citigroup chief economist, economics professor at the London School of Economics and ex-Bank of England monetary policy committee member - proclaiming that Spain "is now at greater risk of sovereign restructuring than ever before." Greece "will have to restructure again," Portugal has a "very high risk" of restructuring next year and Ireland requires "additional official sector support."
There's also our old friend Ben testifying before Congress that, "Higher energy prices would probably slow growth, at least in the short run." That they could "create at least short-term inflation pressures, and moreover, they act as a tax on household purchasing power and reduce consumption spending, and that also is a drag on the economy."
Convincing arguments to exit stage left now, 'ey?
But wait. Hold your horses. Aren't markets already aware of these risks? They've been put in front of their very noses since the year began. It's contained in almost all central bank statements. Something along the lines of "Europe remains a key risk" and "rising oil prices could dampen household spending."
What's not factored in are the upside surprises we've become witness to over the past few months. There's the ECB revising its growth outlook for the euro zone - it now sees the region contracting by only 0.1% (instead of its original minus 0.3% prediction) in 2012 before expanding by 1.1% next year.
And how could we talk of upside surprises without talking about the biggest economy of them all - America. There's plenty there, from jobs to the manufacturing indices, to profits, to increasing household wealth, to jobs - oh, I've said that already, but you get the picture.
As to the stock market itself, there's still momentum behind further advances and it's still cheap at current levels.
Investor sentiment too is on its side. According to reports, US investor sentiment is currently at 45.6% -- a five-week high and has been above its historical average of 39% in 13 of the past 14 weeks.
Unless an unknown unknown rears its ugly head, the year ahead is looking pretty.
