sábado, septiembre 06, 2014



The ECB is blowing smoke in our eyes

Last updated: September 5th, 2014

ECB president Mario Draghi (Photo: Action Press / Rex Features)
Mario Draghi has played a weak hand with skill, as always. He is a superb actor.
Yet the package of measures unveiled by the ECB yesterday is pitifully small and mostly window dressing, an effort to buy time with a mix of vague gestures and outright gimmicks, a substitute for decisive action.
“This is a classic ECB play of the kind we have seen so many times over the last three years,” said Andrew Roberts, credit chief at RBS. “There is huge smoke and mirrors at the time of the announcement, but when you go through the figures 24 hours later you realise it is nothing like what you thought.”
The delirious reaction of market traders is interesting, but essentially just noise. What the ECB did will not move the macroeconomic dial by one iota.
As Christian Schulz from Berenberg Bank puts it, the latest rate cuts are a screen to “paper over divisions”. The ECB could not secure German political consent for genuine reflation, so it put on a pantomime instead.
The new measures add little to what was already on the table in June. Some are marginally helpful, some trivial, with a shocking lack of detail about the one point that really matters.
The ECB has had years to plan asset purchases (QE Lite), yet Mr Draghi dodged all questions about the scale. You might conclude that there is still no real agreement on the course of action. Little wonder since Germany’s member of the ECB board – Sabine Lautenschlaeger – said only two months ago that QE is unthinkable except in an “emergency”, and no such emergency exists.
By default, the ECB is making the same mistake as the Bank of Japan in its dog days, trying to buy time with half measures, hoping that global recovery will lift Europe off the reefs without anything being done. They may get away with this, but there is a very high risk that Europe will instead remain trapped in mass unemployment, with ever rising debt ratios.
The overall policy settings remain contractionary. Monetary policy is still too tight. Fiscal policy is too tight. Bank regulations are too tight. Little is in fact being done to stop a deflationary psychology taking hold across half of Europe. Nobel laureate Joe Stiglitz warns of a depression running through most of this decade.
Mr Draghi said he hopes to “significantly stir” the ECB’s balance sheet back towards the levels of 2012 (€3.1 trillion). That means a €1 trillion boost, and there begins the first big confusion. Much of this will be in the form of cheap loans to banks (TLTROs) in exchange for collateral.
As the IMF said earlier this summer, this not remotely akin to QE. The ECB is not taking the risk on its own balance sheet. The monetary mechanism is entirely different, and far less powerful.
The original €1 trillion of LTROs in early 2012 were a lifesaver because EMU was then in a financial crisis. It stabilised the system (for a few months). But euroland is now facing a different problem. It is in a chronic deflationary malaise, a bad equilibrium. Households are paying down debt. Demand for credit is muted.
Mr Draghi himself suggested in July that the forthcoming TLTRO auctions could reach €1 trillion in various forms. (From which you then have to subtract repayments from the old LTROs). Nick Matthews from Nomura calculates that the actual purchases of asset-backed securities, mortgage bonds, and covered is likely be near €450bn, though others suggest it may be even lower.
This would be spread over three years, a mere €12.5bn a month. This is derisory, and will not even start until the end of the year. All the evidence is that QE works through a critical mass effect. It must be carried out swiftly and with maximum force to break out of the vicious circle.
Marcel Fratzscher from Germany’s DIW Institute has called for €60bn of sovereign bond purchases each month, equal to 0.7pc of total EMU sovereign debt, and roughly in line with moves by the US Federal Reserve.
The Bank of Japan is buying some €55bn worth of assets each month to defeat deflation. This is equal to €140bn of monthly purchases in the eurozone on a GDP ratio basis, ten times more powerful than anything the ECB is talking about.
Nor is it clear how much the ECB can really do since Mr Draghi made a throw away comment that it would buy only “high quality” assets. “It’s absolutely pointless. There is no point bothering if they are not going to take any of the bad stuff off bank’s balance sheets,” said Mr Roberts from RBS.
As for the ten basis point cut in the main interest rate to 0.05pc, it will make no difference, beyond ensuring that banks turn up to bid at the first TLTRO auction later this month rather than waiting until December. Michael Kemmer from the German BDB banking federation says the impact will be “negligible”.
Georg Fahrenschon from German’s savings bank association called it “interest rate cosmetics”, warning that the “latest mini-steps will achieve nothing”. They merely underscore that the ECB has shot its bolt.
Liane Buchholz from Germany’s association of public banks compared it to “a late summer sale”, doubting that it would do anything to entice eurozone banks to take on more risk. How could it do so since new rules and higher capital adequacy ratios are still forcing lenders to deleverage, in some cases with manic determination?
The cut in the discount rate to minus 0.2pc is clearly intended to drive down the euro, so far successfully. It is however a hazardous strategy, which is why the US Federal Reserve and the Bank of England never went this far. Much of Europe’s €900bn money market industry is sliding under water. We can expect an exodus over the next two months as maturities expire.
The ECB is twisting itself in knots, undertaking ever more complicated operations because it will not bite the bullet and launch plain vanilla QE, a €1 trillion blitz of sovereign bond purchases, starting immediately, and with no ifs and buts.
It is not doing this because Germany has a de facto veto, and everybody knows that there will be a challenge filed at the German constitution court the moment any such action is taken. This is not a criticism of Germany. I entirely agree with German patriots who say that QE is fiscal union by the backdoor and an assault on the budgetary prerogatives of the Bundestag, an evisceration of German democracy. It is a criticism of the irredeemably hopeless construction of monetary union. My argument has always been that EMU should be dismantled because it is a creeping danger to democracy.
If the brilliant Mr Draghi were running a real central bank, he would simply carry out old-fashion open-market operations – with an eight hundred year history – and keep buying assets on whatever scale is needed to meet the ECB’s 2pc inflation target. Instead he running a zoo. He is forced by abominable circumstances to blow smoke in our eyes. He is good at it though.

Do Whatever it Takes to Shock and Awe

September 5, 2014 

Draghi beats "Wall Street" estimates.  Markets rejoice. I’m not really that old. And I don’t have tothink back all that many years to recall when “Fed watchers” would monitor every move of our central bank’s “open-market operations” in hope of discerning subtle changes in monetary policy. Things changed profoundly during the nineties, as a long tradition of conservative central banking principles gave way to “activist” monetary management.

Thursday provided yet another chapter in the fateful evolution of contemporary central banking. In what I’ll call “Do Whatever it Takes to Shock and Awe,” Mario Draghi straggled deeper into the uncharted territory of negative rates, while also announcing a plan to aggressively expand the European Central Bank’s (ECB) balance sheet (create “money”) through the purchase of asset-backed securities (ABS) and covered loans. European stocks and bonds surged on the surprise announcement, as the euro currency was taken out to the woodshed.

Central banks now freely peg short-term interest rates (near zero!), manipulate market yields, monetize debt, target/spur higher stock and risk asset prices and essentially promise continuous and liquid securities markets. Importantly, central bankers have been conditioned to absolutely avoid disappointing the markets. Indeed, heads of central banks have one-upped corporate America in striving to “beat expectations.” There is no longer anything cautious or subtle with respect to monetary management. The goal is precisely the opposite. One might these days contemplate why it took central banking a few hundred years to figure this all out – to appreciate the myriad benefits of zero rates, debt monetization and perpetual bull markets.

It seems completely lost on both today’s policymakers and pundits that throughout history global finance was for the most part a self-correcting system of interconnected domestic monetary systems. The inflation of money and Credit was constrained by the likes of gold/precious metals standards, global currency regimes (i.e. Bretton Woods), bank reserve and capital requirements and, fundamentally, by disciplined behavior from bankers, government officials and market participants more generally. The gold standard, in particular, was successful in large part because of the strong commitment nations (policymakers and economic agents) had in preserving the system. Importantly, such a system was self-adjusting and self-correcting. Participants understood that there would be predictable policy countermeasures in the event the system began to move in the direction of excess, with their actions working to counter fledgling excesses and imbalances in finance as well as the real economy.

Things changed profoundly throughout the nineties with the explosion of market-based “money” and Credit. It amounted to nothing less than the final breakdown of any semblance of restrained global finance. With the proliferation of GSE and “Wall Street” finance, there were no longer constraints on the quantity or quality of U.S. “money” and Credit, constituents of the world’s “reserve currency.” America’s feeble savings didn’t matter. Troubling “twin deficits” (fiscal and trade) no longer mattered. With the U.S. able to run perpetual trade deficits, the economic structure could shift to consumption and services and away from industry and production.

Unfettered finance became the U.S.’s leading export to the world – year in and year out. Whether in the real economy, throughout Credit systems or for the financial markets, unconstrained global finance profoundly altered system dynamics: the forces of self-adjustment and correction were relegated to financial and economic history.

Heightened monetary instability and resulting serial Bubbles were readily on display all throughout the nineties. Fatefully, central bankers turned only more “activist.” Instead of recognizing and countering the newfound propensity for system Credit and speculative excess, the Greenspan Fed adopted progressively more interventionist policies (market interventions, manipulations and liquidity backstops).

I began warning/chronicling the mortgage finance Bubble in 2002. It was clear to me at that point that the Fed had learned nothing from its failed policies (including the 1998 LTCM bailout) that had been instrumental in fueling the “tech” Bubble. Worse yet, Fed officials, Wall Street pundits and many economists were calling for only more aggressive market interventions and manipulations. Fed governor Bernanke was espousing absolutely radical measures – while the inflationist caucus had their sights on mortgage Credit as the monetary expedient capable of resuscitating financial and economic booms. There was absolutely no doubt they were setting a disastrous course. It took six years.

In April 2009, I began warning/chronicling the “global government finance Bubble” – the “Granddaddy of all Bubbles.” It was (again) clear to me at that point that the Fed (and global central banks) had learned nothing from its failed policies that had been instrumental in fueling a much more systemic mortgage finance Bubble. Worse yet, Fed officials, Wall Street pundits and the economic community were calling for the most extreme monetary inflation, market interventions and manipulations imaginable. Having moved beyond mortgage Credit, the inflationists were determined to use government Credit to resuscitate general asset inflation (stocks, Treasuries, MBS, real estate, corporate Credit, etc.)

I didn’t anticipate an ECB determined to balloon its balance sheet with all kinds of securities. I didn’t anticipate that Fed holdings would inflate to $4.5 Trillion, nor did I imagine the BOJ willing to do open-ended QE to the tune of $700bn annually. I could not have predicted that post-crisis growth in the Chinese banks would exceed the total size of the U.S. banking system. I didn’t see the creation of Trillions of Chinese “shadow banking” assets. I would not have guessed that central bank international reserve holdings would surpass $12 Trillion by 2014 (almost doubling in six years).

I was, however, able to anticipate a very critical reality that remains fundamental to the ongoing global government finance Bubble: once the world’s central banks adopted unprecedented monetary inflation there would be no turning back. Target higher securities prices and then try to control runaway Bubble excess – in the face of ever-increasing global financial and economic fragility. Indeed, policymakers with their unlimited quantities of central bank Credit and government debt were playing with a much more combustible fire than what had previously culminated in “the worst financial crisis since the Great Depression.”

Traditional conservative central bank principles were fixated on price and financial stability. Foster a stable monetary (money and Credit) backdrop and leave the markets to market participants. Things have regressed to the point where unprecedented market intervention and monetary inflation are required to sustain runaway securities market speculative Bubbles around the globe. Conservatism in (rules-based) central banking was fundamental to avoiding big policy mistakes – as opposed to “activist” discretionary policymaking where policy errors inherently lead to only more catastrophic blunders.

There was never a chance inflationist policy doctrine would succeed. Policymaking today only exacerbates acute financial and economic instability. Central banks are stoking market excess with no hope for extricating themselves from unprecedented intervention and monetary inflation.

There are just so many flaws in conventional thinking. There is the myth that central bankers control some “price level” that they can dictate through policy measures. Yes, they do have the capacity for unfettered “money” creation, but this liquidity has disparate impacts on a multitude of prices. Today, the powerful inflationary bias in securities and asset prices ensures that central bank liquidity exacerbates speculative Bubbles while largely avoiding the real economy. In the face of historic financial excess and Bubbles, it has become impossible for economies to grow out of debt problems.

Draghi devised a clever scheme for buying asset-backed securities (No Germany, we’re not adopting QE financing of government deficits!) from the Eurozone banking system. But why would the banks then use this liquidity for risky lending in the stagnant European economy, when the ECB has made buying government bonds such an electrifying risk-free proposition? Securities markets are betting liquidity will continue to (over)flow into the markets. In Europe and around the world, central bank liquidity and market intervention policies have bolstered the case for financial speculation at the expense of real economy investment.

Unable to inflate a general price level and incapable of determining the effects of their liquidity-creating operations, central bank “money” at this point chiefly chases security market returns while stoking Bubbles. Whether it is the ECB, Fed or BOJ, throw liquidity into the system and it will avoid the disinflationary forces prevalent in real economies in favor of the highly inflationary impulses commanding incredibly speculative global securities markets.

Moreover, in today’s highly connected and unbalanced global system, “money” gravitating toward real business investment works to exacerbate overinvestment and overcapacity, especially in China and Asia. The upshot is only greater instability associated with extreme liquidity overabundance in a global system steeped in deteriorating economic profits and inflating financial and speculative returns. Meanwhile, monetary disorder continues a highly uneven distribution of wealth, within individual countries as well as globally. Remarkably, the policy response is only more vociferous “Do Whatever it Takes to Shock and Awe.”

“When and how does it all end,” is an obvious question. It’s impossible to know, although there is a list of potential catalysts: Crisis in China, geopolitical and a market accident seem to remain at the top of my list. Yet thus far heightened risk – certainly on economic and geopolitical fronts – have ensured “Whatever to Shock and Awe” – more QE from Kuroda, QE from Draghi and, apparently, zero for longer from Yellen.

September 5 – Wall Street Journal (Steven Russolillo): “Professional stock pickers have had a terrible 2014. With Labor Day in the rear view mirror and less than four months remaining in 2014, Goldman Sachs Group Inc. takes a moment to examine how fund managers have fared so far and evaluate the circumstances they face for the rest of the year. It isn’t a pretty picture, but Goldman says that may actually bode well for the market through the rest of the year. Only 23% of large-cap mutual fund managers have outperformed the S&P 500 this year, rivaling the worst performance in the past decade, according to David Kostin, chief U.S. equity strategist at Goldman… Other stock pickers are also struggling in the current environment. Fewer than 20% of large-cap growth and value managers have outperformed their respective Russell 1000 benchmarks, according to Goldman. Hedge funds have also woefully underperformed. The average hedge fund is up just 2% this year, according to industry tracker HFR, compared to about a 10% return, including dividends, for the S&P 500. ‘Choice of shorts and market timing are the clear sources of blame,’ Mr. Kostin said.”

How about the notion that today’s capricious global “activist” policymaking is a market accident in the making? It’s compelling. After all, below the surface of this irrepressible bull market are myriad unhealthy underpinnings. Why are stock pickers having such a miserable time of it? What’s behind the ongoing struggles in the hedge fund community? How can “money” flowing blindly into equity index ETFs just trounce most active managers – mutual funds and hedge funds alike? Because the markets are broken.

Central bank policies ensure that too much (and inflating quantities of) “money” chases too few securities. Zero rates and central bank liquidity backstops have ensured that way too much “money” is chasing too few risk (higher-yielding/returning) assets. Global financial speculation has become one colossal “crowded trade” of epic proportions. Never in history has so much “money” been dedicated to trend-following and performance-chasing speculation. Never in history have central bank measures had such a profound impact on market perceptions, trading dynamics and speculative flows. Arguably, securities prices have never been so detached from fundamental prospects. Never has policy created such uncertainty with respect to what the future holds for finance, the markets, real economies and “geopolitics” around the world. Such a backdrop foments extremely difficult market underpinnings, masked by market indexes rising effortlessly into record territory.

Markets so far this year have punished the Treasury bears. Those betting against what seemed at the beginning of the year to be ridiculously mispriced European periphery debt markets have been killed. The dollar bears have been hammered. The bludgeoned equities bears have been further bludgeoned. The last couple months have seen the emerging market bears taken out to the woodshed (Shanghai Composite up 13% since July 21st). In the face of fragile underpinnings, EM stocks, bonds and currencies have performed exceptionally well.

Throughout global markets, securities prices have tended to defy fundamental analysis. There has certainly been a proclivity for short covering/squeezes – and resulting market outperformance that has enticed flows from the vast global pool of trend-following/performance-chasing speculative finance. Securities prices have been overshooting globally, especially where managers were either short or underweight. This has led to poor performance for all varieties of long/short strategies and resulting outflows - which feeds a self-reinforcing dynamic of short covering (buying) of fundamentally suspect securities/markets along with the liquidation of positions in securities/markets generally viewed as relatively attractive.

This dynamic then intensifies the difficulty for the active-management “stock picker” community, much to the benefit of the burgeoning ETF complex and the bevy of “closet indexers.” It’s no coincidence that this “active manager trounced by index” dynamic occurs simultaneous with historic extremes in “market” bullishness. Indeed, “money” flowing freely into “the market” powers the indexes higher, as aggravated active managers are forced to throw in the towel (including covering shorts and unwinding hedges) and jump aboard the inflating indexes. Below the surface, the “crap” significantly outperforms, much to the benefit of the momentum speculator crowd - but at the expense of the lowly investor (and market stability). It’s all a recipe for quite a market speculative blow-off – similarities to 1999 but across virtually all asset classes all over the world (as opposed to chiefly the U.S. technology sector).

Hundreds of billions flowing into stock and corporate debt indexes is definitely a recipe for a market accident, especially when these flows are largely premised on the notion that stock prices (at least eventually) always go up and that central banks will continue to guarantee buoyant and liquid markets. Throw in a global speculator community that has surely been forced into aggressively long positioning, yet with one eye on hedging instruments and the other on the exits.

And I’d be remiss if I didn’t mention the risk in Draghi’s “Do Whatever it Takes to Shock and Awe.” When he uttered “Do Whatever it Takes, and believe me it will be enough…” back in 2012, this was a direct threat to the speculators that they had better cover their euro-related shorts and go long. This week’s ECB measures came with Spanish yields below 2.25% and Italian yields below 2.5%. They came in the midst of more than ample market liquidity, with European stock prices not far from record highs. For good reason, the markets took Draghi’s Shock and Awe as a direct attack on the euro currency. And in this age of leveraged “carry trades,” trend-following/performance chasing speculation and booming derivative trading, those seeking a weaker euro (European policymakers) should be careful what they wish for. Beggar thy neighbor took a giant leap this week – in the convenient guise of fighting “deflation.”


Steaming Ahead

U.S. equities could head higher in coming months, propelled by strong earnings gains and low interest rates


September 6, 2014

Expect the bull to stay in charge for the rest of this year, and likely well beyond. That's the collective and decidedly upbeat view of the 10 top stock market strategists Barron's recently surveyed to gauge the investment outlook for the months ahead.

The Standard & Poor's 500 stock index already has rallied 8.6% year to date, to a record high of 2007.71, surpassing the mean target of 1977 our panelists forecast last December. Add dividends to the mix, and the total return is 10.1%. Based on the strategists' current mean year-end forecast of 2030, the market could rise another 1% before the curtain comes down on 2014. And that's after last year's blistering 30% advance.

Scott Pollack for Barron's

None of the group, whom we survey each September and December, is bearish these days, although some strategists have toned down their optimism because of the market's gains. Still, the most bullish see the benchmark barreling toward 2500 in the next 18 to 24 months. That would be an increase of nearly 25% from last week's close.

Earnings drive stock performance, and the outlook is relatively rosy here, too. Our 10 savants expect S&P 500 earnings to rise 7% in 2014, to a mean $117.83, after advancing 5.7% in 2013. They look for earnings growth to accelerate to 8.1% in 2015, for a total of $127.34. Industry analysts' forecasts, as usual, are even more upbeat than those of the big-picture crowd, at $119.31 for this year and $133.49 for next, according to Yardeni Research.

THIS YEAR'S STOCK MARKET RALLY owes chiefly to rising corporate profits, as well as a modest increase in the market's price/earnings ratio. Most strategists expect profit gains to remain the primary driver of equity performance, and see little multiple expansion ahead. The S&P 500 currently trades for 15.8 times analysts' consensus earnings-per-share estimates for the next 12 months, up from 15 times at the start of 2014. Today's P/E is slightly above the market's long-term average forward P/E, also 15, but below the P/E at previous peaks.

Compared with equities around the world, U.S. stocks no longer are as undervalued as they were 12 months ago, in part because of improving corporate fundamentals. But they are downright cheap relative to U.S. Treasury bonds, which have rallied mightily and currently sport historically low yields.

Although the bears' ranks have thinned considerably as stocks have pushed higher, some strategists don't rule out a market stumble in the year's final trimester. Yet, they expect any selloff to be limited by the "buy on dips" sentiment evidenced earlier in the year. Our prognosticators don't see a correction -- traditionally defined as a decline of at least 10% in stock prices -- in the offing, although the possibility worries many other investors. After all, the market hasn't seen a drop of that magnitude since 2011.

What might end, or at least interrupt, Wall Street's long-running party? The prime candidate is the looming conclusion, perhaps as soon as October, of the Federal Reserve's monthly bond-buying program, known as quantitative easing. QE was aimed at keeping interest rates suppressed and spurring economic growth. Its finale will remove an important support for the equity rally of the past few years.

Additionally, investors have been keeping a watchful eye on political tensions around the globe, especially in the Middle East and Ukraine. A worsening picture in either place could undermine investor confidence. Likewise, investors would be rattled if the European economy slipped back into recession, despite recent easing actions by the European Central Bank. Then, there's the calendar; September and October historically have been the worst months for the stock market.

OUR PANELISTS GOT MUCH RIGHT about 2014, based on the forecasts they put forth in December for the economy and the market. But, like almost everyone else, they were spectacularly wrong about interest rates. Their general call for rates to rise sharply this year has been upended by a slide in the yield on the 10-year Treasury bond to 2.46% from 3% at the start of the year.

Yet, even after the ferocious rally in bonds (bond prices move inversely to yields), strategists persist in calling for Treasury yields to rise by the end of this year; their mean forecast for the 10-year yield is 2.89%. If they are right, however, the ensuing drop in bond prices could rattle the stock market. This time, at least, the strategists acknowledge that the rate consensus could be misguided, as there are strong global forces still keeping a lid on U.S. yields. More about that in a moment.

For a pleasant change, the political climate in the U.S. no longer seems such a pressing concern to Wall Street. That's because party warfare over issues such as taxation, the federal budget deficit, and the debt ceiling has diminished in ferocity, at least temporarily.

Moreover, the Street's strategists don't envision that the results of November's midterm election will bring much change to the balance of power in Congress. Debate about issues such as corporate tax reform and immigration policy, which might otherwise contribute to market volatility, is likely to be pushed to 2015 or 2016.

Good news about the U.S. economy, too, could lead to higher stock prices. Second-quarter growth of 4.2% in gross domestic product indicates the economy is finally starting to boost itself out of its low orbit, after expanding by an uninspiring 2% or so year-on-year in the previous five quarters. Moreover, an 11.7% rise in second-quarter S&P 500 profit, and a 6% jump in quarterly revenue per share, have gladdened many bulls.

IF THE ECONOMY CONTINUES to strengthen, capital spending will rise. Small wonder, then, that many strategists call information technology and industrials their favorite S&P sectors for the rest of the year. Tech is universally loved by our forecasters, and has been for several years. It is the third-best-performing sector year to date (see table below).

Similarly, strategists favor cyclical sectors over defensive sectors, which include utilities, telecommunications, and consumer staples. Utilities and telecom are considered bond proxies and would be hurt if interest rates rose, while consumer staples have above-market P/E multiples and aren't leveraged to economic growth.

Utilities also won little love from our experts in December. But they confounded the bears by outperforming all else in the first half of 2014 as bond prices rallied and yields fell. Here's a closer look at factors likely to shape investors' behavior and the market's performance in the final stretch of 2014, and beyond.


Our panelists view U.S. stocks as neither cheap nor expensive, considering the low level of interest rates. "Stocks offer less compelling value than a few years ago," says Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Merrill Lynch. "But if anything, there's an upside risk to my view" that the S&P 500 will end the year around 2000.

Macroeconomic data are improving, and profitability is broadening out, she notes, with every S&P sector exhibiting earnings growth in the second quarter. At the same time, the market's price-to-book-value ratio and corporate debt levels are modest compared with prior market peaks (see table below).

There is plenty of cash on the sidelines, and investors' equity allocation remains conservative, says Subramanian. "The market is supported by a 'buy on pullbacks' mentality, and a pullback of more than 5% would be a surprise," she says.

Stephen Auth, chief investment officer of Federated Investors, concurs. His outlook remains among the most bullish, and his market views have been right on the money for the past two years. "The U.S. economy is accelerating and so are earnings," he says. "Institutional investors are underperforming. There is an energy renaissance in the U.S., and the housing market is doing well. The underlying fundamentals are really good."

AT THE SAME TIME, interest rates have been kept low by global economic and policy forces. "We're just exiting a 15-year bear market, with stocks effectively up roughly 30% since the 2000 high, or by about 2% per year," Auth says. The Nasdaq Composite hasn't made a new high since 2000, and "an entire generation of investors has been taught that what goes up must come down hard," he adds.

After the second quarter's bright showing, investors expect things to revert to "slow-growth mode," and they remain skeptical of the bull market. Auth views that as a bullish indicator. "People are seeing a rally and rollover, but I don't see the rollover," he says.

Auth expects the S&P 500 to climb to 2500 or so in the next 18 to 24 months. "Whatever correction we get will be short and shallow," he says.

He's an exception among his peers in arguing that the market's P/E ratio could rise to 17 times future earnings, at least.

New to our strategist lineup this fall is Jonathan Glionna, named head of U.S. equity strategy at Barclays in July. He replaces Barry Knapp, a former Barclays strategist who left the bank. Glionna has a year-end price target for the S&P 500 of 1975, and a target of 2100 for next year. He contends that the S&P 500 is "modestly expensive" at a current 15.8 times his 2015 earnings estimate of $127 a share.

The "recovery rally" has run its course, and returns from here could be "much more moderate," he says. The missing ingredient is revenue growth, which has been less than 3% a year for many S&P companies. Glionna anticipates that top-line gains will remain subdued because of weak domestic and international economic gains. While S&P 500 sales rose 6% in the second quarter, he ties that to sales activity pushed forward from a soft first quarter, when U.S. GDP contracted by 2.9%, partly as a result of severe winter weather around the country.

GROWTH REMAINS ANEMIC in Europe, Corporate America's second-most-important market, he says. Indeed, recession fears have been bubbling up again on the Continent, where second-quarter GDP contracted in Germany and Italy, and was stagnant in France. Absent higher revenue growth, market gains could track earnings increases, Glionna says.

Jeffrey Knight, head of global asset allocation at Columbia Management, also tempers his bullish view. "The U.S. stock market is pricing in prosperity, but prosperity seems to be applying to a shrinking subset of global markets," he says.

Japan isn't doing well, and a European slowdown won't help. "It's not clear that the U.S. can decouple from a global slowdown," says Knight, whose year-end target is the lowest among the 10, at 1950.

Interest Rates

David Kostin, chief U.S. equity strategist at Goldman Sachs, says the interest-rate outlook is the biggest risk for stocks. Economists currently expect the Fed to lift the federal-funds rate beginning around the middle of 2015. (The fed-funds rate, which the Fed has targeted at 0% to 0.25% since December 2008, is the overnight lending rate depository institutions charge one another to borrow money stored at the Fed.) Anxiety about higher rates usually rattles stocks, but in Kostin's view, it is hard to see a catalyst for a 10% correction. "Possible? Yes. Probable? I don't think so," the strategist says.

Adam Parker, Morgan Stanley's chief U.S. equity strategist, says the end of QE could usher in a more-volatile market, especially if it coincides with big reductions in analysts' earnings estimates. Wall Street analysts often mark down their numbers in September, as companies' full-year performance comes into better view, he says.

Russ Koesterich, BlackRock's global chief investment strategist, is expecting the market to weaken some this fall, but he does not predict a classic 10% correction. He maintains a year-end price target of 2025 on the S&P 500. Koesterich says evidence of robust U.S. economic growth could force the Fed to accelerate a "normalization of rates." An adjustment forward of expectations could produce heightened volatility, he adds.

Even if rate fears rock stocks this fall, other forces could keep a ceiling on Treasury yields, perhaps beyond late next year. The decline in bond yields in 2014 is a reflection of events beyond these shores, says Columbia's Knight. The political tension and violence sweeping other parts of the globe has ignited a flight to safe-harbor assets, U.S. bonds among them.

BEFORE YOU COMPLAIN that a 2.4% Treasury yield looks puny, compare that with the less-than-1% yield on 10-year German Bunds, and low yields across much of Europe. Comparable bond yields in Japan are even lower, at 0.5%. Such wide spreads have turbocharged the rush into U.S. bonds.

A change is unlikely in the near term, which could support U.S. bond prices, keep the pressure on yields, and buoy equities, says John Praveen, chief investment strategist at Prudential International Investments Advisers.

On Thursday, the European Central Bank lowered its main lending rate to 0.05% from 0.15%, and announced the launch next month of two new programs to buy asset-backed securities and covered bonds issued by euro-zone banks. In recent speeches, ECB President Mario Draghi has voiced fears about the stagnant euro-zone economy and signaled that the central bank was moving closer to large-scale asset purchases.

Japan, too, will have to expand its monetary-easing action, Praveen says. Put another way, the Fed will be passing the QE baton to other central banks. Even emerging-market countries are reducing interest rates.

The strategists all say Treasury yields eventually will have to rise and bond prices fall if the U.S. economic recovery continues on its current path. Still, yields could remain relatively low for a while, lending support to stocks, Praveen says.

Like Auth at Federated, Praveen consistently has been among the most bullish of our pundits. His year-end S&P 500 target also is 2100. The S&P's earnings yield -- or earnings divided by price -- is 5.6%, more than double the 10-year bond yield. Although not as cheap as they were nine months ago, "stocks are a screaming buy compared to bonds," Praveen says.

Market Sectors

Technology stocks once again are the darlings of stock market strategists, not least because tech companies are expected to produce the strongest growth in earnings per share. Mostly, that's because capital spending looks poised to expand.

Citi Research trolled through more than 700 company reports in recent months for management guidance from chief financial officers and the like. Its researchers found that capital-spending expectations appear to be moving up sharply, says Tobias Levkovich, Citi Research's chief U.S. equity strategist.

"Last December, the CFOs were expecting 1.5% capex [capital-expenditure] growth, which rose to 5% in March," he says. "That jumped to 6.8% in June. Capex is accelerating." CFOs in the tech sector were anticipating a 10% bump in capital spending.

Business investment has been unsteady in recent years, but second-quarter GDP numbers suggest that investment is improving, says Nuveen Asset Management's chief equity strategist, Robert Doll. Businesses sharply increased spending in the April-June period on buildings, up 9.4%, and equipment, up 10.7%.

The tech and industrial sectors were beneficiaries, says Doll, who likes Apple (ticker: AAPL) and Microsoft (MSFT) for their ample free cash flow and profits, and Hewlett-Packard (HPQ) as a turnaround play in the sector.

The U.S. tech sector is a leader in mobile, the cloud, and "everything that is exciting in tech," says Federated's Auth. Google (GOOGL) is one of his current picks, in part because it is just starting to monetize valuable assets. Also, while the shares trade at a market multiple, the company could enjoy a 20% gain in earnings per share this year.

BANK OF AMERICA'S Subramanian says an expected rise in bond yields could lead to losses in slow-growth, high-yield sectors such as utilities and telecom. Multiple expansion has been most pronounced in defensive shares, and as the market keeps rising, "you could see a trade-off," she says. Winning sectors, such as tech and industrials, could benefit from rising P/Es, while defensive names could experience P/E compression. Inexpensive and largely ignored big-cap tech names such as Cisco Systems (CSCO) could find themselves back in favor again, she says.

SMALL-CAPS HAVE HAD a dismal year relative to their larger cousins, with the Russell 2000, a popular small-cap benchmark, up about 1% on the year. Citi's Levkovich expects small-caps to continue to underperform. High-yield corporate-bond spreads have widened, and that typically isn't a particularly good signal for small-caps, he adds.

Nor is increased volatility. Besides, Levkovich doesn't expect smaller stocks to capture any improvement seen in global growth, given their relatively low exposure to international sales.

Investment Risks

Even the most bullish strategists acknowledge there are risks to the market that could undo their optimistic forecasts. A quick and sharp rise in U.S. Treasury yields would be most unwelcome by equity investors, and no one, including the governors of the Federal Reserve, knows how bonds will react when the central bank ends its purchases.

World growth is expected to accelerate, but Europe is teetering on the edge of another recession. Further ECB easing might not be enough to forestall a contraction in the euro zone's economy.

THE BULL HAS RALLIED while the Middle East has burned. However, a worsening of the political and military backdrop in that troubled corner of the globe could spook investors in the future, especially if hostilities threaten to disrupt America's supply of oil from the region. Domestic production of oil and gas has been soaring, but the stock market has never cheered a sharp spike in energy prices.

Tensions between Ukraine and Russia have been escalating all year, and things could easily get worse. Some pundits think this is Europe's problem, but flare-ups in the hostilities already have sent mild tremors through U.S. stocks. "Europe is a key area to watch," says Columbia Management's Knight.

If the region can pull out of the economic doldrums, the U.S. market could well profit from European growth. "If Europe can't, it begins to have an echo effect in the U.S.," he says.

Nevertheless, U.S. stocks appear to be the best-positioned asset class relative to U.S. Treasuries and global equities, according to Wall Street's top seers. The horizon is reasonably clear, they say, and it's steady as she goes.