MARKET RALLY RISKS SUBSIDENCE / THE WALL STREET JOURNAL ( A MUST READ )

HEARD ON THE STREET

FEBRUARY 15, 2011, 1:17 P.M. ET.

Market Rally Risks Subsidence .

By LIAM DENNING

Bravery comes easier when you've got an army behind you. That's particularly so when the ranks include U.S. taxpayers and the Federal Reserve.


If fourth-quarter results come in at least as well as analysts forecast—and results to date suggest they will exceed them—the S&P 500 will boast healthy margins and prospects for a pickup in revenue growth.


If that suggests the stock-market rally has legs, however, the next question concerns what those legs are standing on. The Fed's bond buying, suppressing the cost of capital, is one supportive but ultimately unstable edifice.


The other is fiscal policy. Charles Dumas of Lombard Street Research reckons accelerated depreciation allowances this year could push gross domestic product growth in the fourth quarter of 2011 to more than 5% year-on-year. But he warns that by dragging growth forward from later years, we can expect sharp dips in the growth rate further down the line.


Meanwhile, brokerage LCM Commodities points out the increased importance of transfer payments from the government to consumers, such as unemployment benefits. These fluctuated in a range of about 16% to 18% of personal consumption expenditure between 1995 and 2007. They have climbed sharply since, standing at about 22% by the end of 2010.


It is usual for governments to step in when the private sector hunkers down. The danger, especially this far into the rally, is dependence on such supposedly temporary measures. Strangely, per-capita personal-consumption expenditure has been running noticeably ahead of consumer-confidence measures over the past year, compared with a usually close historical relationship, according to LCM. If transfer payments provide the missing link, it isn't a particularly strong one for investors to rely on.
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