If the market had opened Monday it could have been rough sledding as President Obama came out swinging on taxes and entitlements and on grand global themes like the need for America to save the world from climate change. These things sound expensive and are drags on the economy. President Obama went on to say:
"They do not make us a nation of takers. They free us to take the risks that make this country great."
He was referring to Medicare, Medicaid and Social Security, although I guess alluding to welfare, food stamps and all the other programs and freebies that speak of compassion and helping our fellow man. There wasn't much about our fellow man helping himself. President Obama ditched the need for a great speech to deliver a shot across the bow. It's going to be an ugly four years where all the foundations of the nation will be attacked.
Yet, I'm very bullish on the stock market. I think there is huge potential; in fact, this could be the year the stealth rally sparks a few water-cooler conversations.
Stock Market Bullishness
My bullishness comes from several factors of which many have already begun and should pick up steam. The next leg of the market rally will not be a reflection of the US economy. Instead it will be driven more so by the global economy coupled with tepid domestic GDP and a move into positive territory in Europe. But this is about China coming on strong and the rest of world following behind. China will add almost three times more to the growth of the global economy than the United States in the next year. India and "other Asia" will match the impact to GDP growth of the global economy.
Emerging nations will add more than 300% more than advancing nations.
> Global Economy
> Global Peace
> Valuations
> Great Rotation
US companies are poised to benefit big time from the growth of the global economy. The companies in the S&P 500 get more and more of their revenue and profits from outside the United States. The rest of the world is growing, having stumbled with growing pains and global recession. There is a certain kind of determination. The great news is that American companies are riding those waves. 
Global Peace
Steven Pinker wrote "Better Angels of our Nature: why violence has declined" in 2011 pointing out that violence as a percentage of population is at the lowest level in the history of mankind. He points to several factors including:
> Agricultural advancements
> Rise in feminism
> Abolishment of slavery
> Growth in democracy
While there are always any number of wars and skirmishes at any given time, battles are less deadly than in the past with respect to number of combatants killed as percentage of overall population.
Battles before countries organized were 500 out of 100,000 population
Battles in 19th century France 70 out of 100,000 population
Battles of WWI & WWII (including genocide) 60 out of 100,000 population
Battles today 3/10 out of 100,000 population
While Pinker points toward "better angels" there are some scholars that simply believe mankind has come to understand there is less profit in wars than in peacetime, particularly these days when the global economy is so embedded that all nations have stakes in peace.
Pinker points out how much smarter people are as well, saying a kid scoring 100 on an IQ test today would have scored 118 in 1950 and 130 in 1900.
For all the talk of the Military-Industrial complex the world is endeavoring for peace, although the Middle East remains a problem, and one day we could see an arms race in Asia for oil in the South China Sea. Peace brings prosperity and also hastens growth in places that have been self-destructive in the past. Part of this peace is the advancement of technology, which makes it easier to focus on economic opportunities rather than deadly conflict.
Valuation
The S&P 500 price to earnings ratio (PE) is just north of 14 versus the historic average of 18.2 (since 1995). This suggests a lot more room to the upside for the market. In addition, the Dow Transportation Index just reached an all-time high, and that often is considered the best indicator that the broader economy can shoulder higher levels for the Dow Jones industrial Average. Moreover, most large cap names are extremely undervalued compared to historic norms. Many of these companies get more revenue and profit from outside the United States, which means growth could get to the point that it triggers institutional investing.
Great Rotation
$3.75 billion & $7.53 billion are the tallies for monies pouring into equity mutual funds during the first two weeks in January. This is huge and, in fact, the best two-weeks since April 2000. There has been speculation that interest rates cannot go lower, and at some point the Fed will have to remove accommodations. I'm not sure that happens this year, especially if 6.5% unemployment is the barometer. But government bonds could see an exodus of cash as the stock market gains momentum. Moreover, the ten year yield above 2.0% is a buy signal and could hasten the return of the so-called cult of equities declared dead by many including Bill Gross last year.
Before this happens in earnest look for all the money printing by the Fed to begin to make a larger impact as the dams at banks holding back the funds from Main Street open up, even as new and Draconian rules are released. Now that many have repaired their own balance sheets having so much cash is a liability, not an asset, for banks that have made it through the worst (although I can't vouch for some of the larger money center banks).
Risks and Potential Time Bombs
The biggest risk to the market in 2013 comes from the White House although Washington DC in general poses a threat to the economy and credit ratings. When President Obama started the inauguration with talk of climate change I cringed. I'm sure in his wildest dreams we would hike significantly the price of energy for homes and businesses, tax gas emissions and loot the oil industry via more taxes and regulations.
I don't see them getting rid of fracking, just demonizing it enough to force onerous taxes to fund green energy projects that mostly line pockets of political cronies and create very temporary jobs.
The debt level is at a point where it already takes a toll on economic output, but where the breaking point comes I'm not sure. The Fed has printed up $3.0 trillion and flushes $85.0 billion a month in a desperate attempt to spark some kind of real economic growth.
As for debt, it's only a matter of time before it sinks all our hopes but that doesn't happen overnight or in 2013, although now is the time to fix the problem even if some people think that makes us mean. Getting help from the government doesn't make you a moocher but there is something tragic to be born on, and then to die on, handouts. It does make you a taker but it also means you are ignoring innate gifts from God that could be developed into something special- a life worth cherishing that didn't demand from the earnings of others and didn't weigh on society.
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