Every day, I am queried (assaulted, in some cases) by incredulous traders about this rally.
"This is ridiculous, Pisani!" they say. "It makes no sense. You can't possibly think you could explain this."
Well, I think I can. There is a "stew" of ingredients that is creating a squeeze on stocks. Here are the components:
- Massive liquidity, +
- Search for yield (higher demand for stocks), +
- Modestly higher (record) earnings, +
- Heavy stock buybacks (constricting supply), +
- Heavy Fed bond buying (constricting supply), =
- = A stock squeeze!
That's the way I understand it. Is it that hard to figure out? You're throwing massive amounts of money at the market, getting modest earnings growth, creating higher demand while constricting supply. This is not like we're trying to figure out the origin of the universe. Really.
I'm not the only person to point this out; Citi did a paper a while ago with the subtitle, "Too much money, not enough assets to buy." Exactly.
What about the role of earnings? I agree, this is not a "conventional" rally. It's not fueled by a multiple expansion—the S&P 500 is at about 15 times forward earnings, historically a normal valuation. There is only modest earnings growth (five percent or so), largely fueled by the effects of lower interest rates.
Because stocks are not overvalued, we can go higher with only modest earnings growth. But wait ... the S&P up 14 percent when earnings growth is only five percent? That has happened many times in the past, but it can happen now because so many participants are being forced into stocks in a search for yield.
That's why so many companies are raising dividends. If you can't get top-line growth (only 1.4 percent this quarter) than you have to keep raising dividends. So far, 180 companies in the S&P 500 have raised dividends this year.
So how long will this go on? I have no idea, but I think the Federal Reserve and other central banks are likely to remain accommodative for a lot longer than people think. I doubt anything will change in 2013.
—By CNBC's Bob Pisani