The Rising Stock Market

All the pieces are coming together and it's clear that the economy is picking up steam. Industrial production is rising and with it capacity utilization, which is at a two-yer high. Retail sales are strong, especially online. The Index of Leading Indicators is rising every month; fourth-quarter GDP could very well top 4.0 percent and 2011 is looking better and better.

Wall Street analysts, money managers and yes, even a few ordinary investors, for months a gloomy group, are discovering reasons to be optimistic and buy stocks. Economists have turned positive as well, boosting their GDP estimates for 2011. That should be good news for stocks, but only to the extent that it's not already reflected in current prices, which are up 90 percent from the March 2009 low. For sure, to some extent the improving outlook is already reflected in prices. How much? No one knows, but I say not nearly enough.

Corporate profits, I should remind you, are the driving forces for stock prices. Not interest rates, not taxes, not politics. Profits are the mother's milk of stocks. The most important variable is the multiple (p-e) investors put on future profits, not on this year's numbers but those for next year and beyond. That multiple will depend on the outlook for rates, the allure of competing investments, and other factors -- some financial, some subjective. The focus on future results is why stocks don't move, as some put it, with "good" or "bad." They move with "better" or worse." Good and bad describe current conditions. Better and worse are clues to the future.