These tentative bulls say it's irrelevant that profits and economic growth appear to be slowing or that much of the world is in recession. As long as individual investors continue to pour money into the US market, share prices are going up. "The public's back in the game," said Steven Leuthold of the Leuthold Group "We think the market will reach new highs." That's a startling prediction from someone who's made the case since 1994 that stocks are dangerously expensive. Mr Leuthold says stocks are still too dear, but it doesn't matter. "The public doesn't care about valuations. The public only knows that the market is the best place for their money."
The S&P 500 has surged 17 per cent since 8 October and the Nasdaq is up 30 per cent. "People have been schooled on buying on the dips," said Peter Havens, manager at Bryn Mawr Trust. "We keep wondering when that will stop."
No matter what the Fed decides at its interest rate meeting this week, Treasury bonds are also likely to gain. Many investors expect the Fed to reduce rates on Thursday for a third time in seven weeks. Yet even if it doesn't, slowing growth, tame inflation, and the prospect of less Treasury borrowing will probably help bonds gain in the months ahead.
"There's going to be slow growth and low global inflation," two pluses for bonds, said Martin Jones at First American Asset Management. "The Fed isn't likely to change that trend." He sees the 30-year bond yield falling to 41/2 per cent within six months from 51/4 per cent now.
For the week, stocks retreated. The S&P 500 fell 1.3 per cent, the Nasdaq 0.5 per cent and the Dow 0.6 per cent on concern that the US may lead an attack on Iraq and that the Fed may not cut rates this week.
Yet many investors now say a war is unlikely to have much effect on the US economy. And they make the case that the bull market can weather inaction by the Fed. The bigger concern is that stocks are still expensive. While Mr Leuthold predicts the Dow will surpass 10,000 next year, he calls the US market "radically overvalued". "When the public love for stocks grows cold, as it always does, it's going to be a long way down."