The front page of today's Wall Street Journal trumpets "Stocks Recapture 9000 on Profit Surprise." I can't think of a better example to underscore one of the key principles we have been trying convey on this site for the past several months: the capital markets are driven by changes in future expectations. When pessimism is high, the market is often setting up for a reversal in expectations. And when negative expectations reverse, the ensuing rally can be spectacular.
The current reversal is no different. Here's an excerpt from the Journal article:
The rally that began March 9, when the Dow closed at a 12-year low of 6547.05, now has sent the blue-chip average through 7000, 8000 and 9000, for a gain of 38.5% in less than five months. This marks the biggest percentage gain in such a short time since 1975, according to Ned Davis Research.
Some pundits are claiming that stocks prices are unrealistically high given the deep economic troubles we still face. Others worry that the market is "due for a correction" simply because we have crossed 9000 on the Dow. But both arguments really miss the point: The markets look forward. While traders might need to worry about a correction from a given level, investors need to stay focused on two things: reward for risk and relative value. On both dimensions, the gains in U.S. stocks look very sustainable.