What a start to the year. Revolution across North Africa and war in Libya, $100 oil, renewed crisis in the euro zone and an environmental and nuclear disaster in Japan all tested investors' nerves in the first quarter of 2011; but despite this wall of worry, the Dow finished the quarter up over 6 percent.
The bulls dismiss all the problems facing the world and point to a strong recovery in the US, emerging markets and corporate profitability and predict the "Teflon market" will not come unstuck.
For the bears it is a case of take your pick; so many factors are making them nervous that they simply cannot accept the market can hold on to the gains made over the last two years since the March 2009 lows.
The key battleground for the bulls and the bears though remains the second round of quantitative easing (QE2) and the impact extraordinary measures by the Fed and other central banks across the world are having on asset prices.
The bears say that when QE2 comes off the table, stocks will head south as quickly as they rose when Federal Reserve Chairman Ben Bernanke first indicated the measures would be put in place.
This will be the question that dominates the argument over the coming weeks as we get closer to the point where the Fed either has to announce the end of QE2, extend the measures or indicate QE3 is actually needed.
James Bullard, former member of the Federal Open Market Committee, has been leading the charge calling for an end to QE2 but the market remains unsure of Bernanke’s intentions, making this month’s first ever post-meeting press conference on April 27th the key date at which this argument could be settled one way or another.
The Bull Market Case
The bulls have until now been stunningly correct, much to the annoyance of the bears. Stocks have nearly doubled over 2 years and there are those who believe this is set to last.
“$100 oil, the euro zone crisis and the devastation in Japan are simply not major issues for the stock market for one simple reason, the credit markets are open for business again,” said Michael Browne, a fund manager at Martin Currie in London.
“Growth is good and I am taking on risk in countries like Spain where the employment situation is finally improving; there are more gains to be had in equities,” Browne told CNBC.
In the same camp as Browne is Citi chief economist Williem Buiter who says the twin shocks of $100 oil and the Japan disaster will not knock global growth.
Buiter believes global growth will remain strong in 2011 and 2012 despite a huge transfer of wealth between oil exporting and oil importing countries.
Dennis Gartman, the founder of the Gartman Letter, told CNBC on Friday that you have to be a bull at the moment.
“You have to be, the amount of money being pumped into the system by the Fed, the ECB and of course the BoJ means you have to be in equities. Until the economy really picks up and this money goes into plant and equipment instead of equities you should not sell,” Gartman said.
Bulls Eye Bears
There are those who have been bullish but are beginning to take risk off the table as they struggle to argue with the bears over the possible impact of the wall of worry.
Analysts like Larry Kantor at Barclays Capital are advising investors take risk off the table whilst HSBC chief economist Stephen King is increasingly worried about what he describes as the marriage made in economic hell, high inflation and low growth.
The Bear Market Case
At the other end of the spectrum are the uber-bears who see doom and gloom around every corner.
Albert Edwards, the Societe Generale strategist, believes the global economy is on the critical list and is only off its death bed due to the "financial morphine and steroids" being pumped in the central banks.
He sees doom everywhere and over the long-term believes unfunded liabilities on health care and pensions make nearly all major governments insolvent.
The problem for Edwards is that the market just keeps on ignoring this kind of doom and gloom. He openly admits that being a bear is a lonely place until you are proven right, something the likes of Nouriel Roubini will know only to well.
Calling the end of the bull market is not easy. Marc Faber, the author of the Boom, Doom and Gloom report says it is it is a lot easier to call the lows than the highs.
“I have always underestimated the madness of the investment community” says the man who called the 1987 crash one week before it happened with an "element of luck" and called the end of the tech bubble two years early.
One thing is for sure, the second quarter, like the first, is going to be a very interesting and worrying time to be an investor.