There is an old saying: "Don't fight the tape!" -- meaning, of course, sometimes the stock market just wants to go up regardless. That seems to be what we have been witnessing the past few weeks as the stock market has almost regained its high for the year.
Why and where next? First, the economy. The economy has weakened over the past few months and seems to have stalled. GDP growth may be zero at this point. There are some bright spots: the energy sector is the brightest, housing has started to look better in most sections of the country. But, the trends are down everywhere else. A slide into negative growth territory is probably ahead in the second half of the year.
What about Europe? The steady slide into economic and political chaos continues across the Eurozone. The only thing new is the strong possibility that Germany may join its sister states into the slide into disaster. None of this has much to do with the Euro at this point. The real issue is that debt market buyers seem poised to walk away from several sectors of the European sovereign debt market. As that happens, Europe may descend into a new dark age. Watch Greece and Spain for a preview of the future for much of Europe. Thus far, there has been no reform and no austerity. There have been government layoffs in Greece and Spain, but mostly because there is simply no money left to pay them.
What about the US business community? This sector of the economy has not been this dispirited since the 1930s. Large swaths of the American public no longer seem to believe in free markets. That Obama still polls as high as he does is a clear indication that capitalism is in a fight for survival. With half of all Americans now on some form of government support, the trend is ominous. Given this atmosphere, the business community is frightened out of its wits and unlikely to provide the normal impetus to economic recovery that has appeared in every recession since the 1930s, except, of course, this one.
Without a recommittment to free markets, it is hard to see how the US situation gets any better. The "tax the rich" themes of the Obama campaign, where "rich" is defined as someone making income of $ 200,000 per year, is hauntingly similar to Francois Hollande's call for 75 % tax rates in France. Unemployment in France is now in double digits and rising and growth has turned negative. Investors are looking for ways to hide income and assets, as opposed to looking for ways to deploy their assets in new businesses and ventures.
Congressional Democrats believe that more food stamps and more unemployment compensation is the way to promote economic growth. You wonder if they are kidding about this. The President thinks business can grow and prosper without entrepreneurs. He seems to believe that people should risk their capital without any hope of economic reward. Receiving rewards for risking capital seems to be viewed as a criminal activity by the current occupant of the White House.
With this backdrop, stocks seem fully priced even though earnings reports are favorable. Unless and until government policy becomes more tolerant of free markets, it is hard to see anything but trouble ahead for both the stock market and the American economy. I would continue to avoid the stock market in this unfriendly environment.