Go back to the 1930s — we had a very nice stimulus-led economy and stock market from 1933 to 1936. But once the government began to take its foot off the accelerator, we had the severe 1937-38 recession and bear market. Investors could not see beneath the surface of just how fragile things really were in that 1933-36 period — the economic growth was hardly organic as history has shown us. The biggest mistake the bulls made back then was overstaying their welcome.
The dramatic bounce-back in the equity markets yesterday (with follow-through today) boiled down to several factors:
1. Strong hints from Trichet that the ECB is going to step up to the plate and aggressively support the bond markets of Portugal and Spain.
2. The strong global purchasing managers’ indices, especially the number out of China.
3. Signs that Bernanke is working behind the scenes on Capitol Hill to promote more short-term fiscal stimulus.
4. The strong ADP jobs data.
5. Growing talk that a deal will soon be reached that will extend the Bush tax cuts as well as the emergency jobless benefits.
6. Goldman Sachs’ economics department threw in the towel and substantially raised its GDP forecast for the U.S. for 2011 and 2012.