HAS THE STOCK market rally run too far, too fast or is this only the beginning to a new major bull cycle? This is the question on many investors' minds as we enter the second-quarter earnings season in the United States.
There are still many sceptics who argue that in the real economy, not much has changed, but with stimulus coming from all directions, can a US-led global recovery be far off ?
Unfortunately, for every report suggesting an incipient US economic turnaround, other indicators suggest weakness. Persistent deflation, in particular, has prompted concerns from Federal Reserve chairman Alan Greenspan.
Remember, this rally is liquidity-driven. US interest rates are at 1 per cent, a 45-year low, and again this week, the Bank of England and the Bank of Korea unexpectedly lowered interest rates to record lows of 3.5 per cent and 3.75 per cent, respectively.
Above all, as the US swings into a predictable political cycle, market watchers are focused on the lesson learned by President George W. Bush's father - You can win the war but still lose the election.
Many analysts expect fiscal stimulus, often referred to as the 'Bush Push', to keep the US dollar weak and the stock market strong. The latest fiscal stimulus comes in a US$350 billion tax cut, the bulk of which will come, not surprisingly, before the November 2004 US presidential election. The theory is that more money in the pockets of consumers should aid consumption, in turn boosting corporate earnings and the stock market. That would produce more tax revenue, offsetting the effects of tax cuts. However, spending or the lack thereof, is not the reason for this economic downturn.