With the S&P 500 reaching 1,400, the real question is: "Why are investors sceptical?"

There are plenty of reasons: Oil prices and prices at the pump remain high; Israel might strike Iran, causing turbulence in the Middle East; the 10-year US Treasury note has risen to 2.3 per cent and the era of depressed intermediate-term interest rates may be over.

Next January, a major fiscal drag will begin with tax cuts expiring, the automatic sequestering of funds for defence and health care resulting from the US Congressional failure to come up with $1.2 trillion (Dh4.4 trillion) in budget cuts over 10 years, the payroll tax holiday will end and the Obama universal health care programme will start.

For the last two years the US equity markets have done early in the year, running into trouble by March. The adage "sell in May and go away" rings true. Why should this year be any different? Some bears would argue that indexes are where they are because central banks poured liquidity into markets.

In the US, M2 has been rising and is up 10 per cent YTD. The European Central Bank has put over ¤1 trillion (Dh4.8 trillion) into the European economy, shoring up the banking system and preventing recession. While much has been absorbed into the real economy, some has found its way into financial assets, driving stock prices higher. The US housing industry has been stabilising and retail sales strengthening. Quarter to quarter retail sales are up 5 per cent. Household net worth increased 30 per cent since last October, helping both sectors.

Early this year, most investors were cautious and a pessimistic mood prevailed, but economic news improved as we moved into the new year, with initial unemployment claims lowering and the rate declining. First-quarter industrial production was up 9.5 per cent (strongest gain in 15 years). Capital spending remained robust. With operating rates below 80 per cent, not a lot of new plants were being built, but manufacturing employment is increasing faster than service sector employment, a first in 35 years.

Small business optimism levels have increased and there is evidence that banks are lending again. At the beginning of the year a Eurozone breakup was a major investor concern, however there are new people in critical roles (albeit untested) there.

Draghi as ECB head provided substantial liquidity to strengthen the banking system, offsetting the impact of austerity programmes. Italy's Monti enlisted support from ex-Berlusconi followers, and introduced positive reforms. Italy and Spain's economic prospects have improved — a positive.


It appears that the EU will hold together despite ongoing Greek troubles. Draghi seems to be emulating the US during the 2008 crisis, providing funds to avoid a meltdown, a reversal from previous policy focused on controlling the rise in inflation through a restrictive monetary policy.

However, the mood has changed to optimism. Most investors have been slow to put their money to work and, as a result, many hedge funds and long-only investors are lagging behind the performance of the major indexes. Ordinarily, optimistic sentiment readings presage a market correction, but with many investors looking for opportunity to increase their exposure that even a minor downdraft gets cut short by the flood.


The writer is vice-chairman, Blackstone Advisory Group.