Kass: Market Ignorance Is Bliss

This blog post originally appeared on RealMoney Silver on Nov. 12 at 8:15 a.m. EST.

The message of the markets over the past few weeks is that, with increased certainty, investors are growing more comfortable with the forecast of a smooth and self-sustaining economic recovery in 2010 and beyond. Many now have even adopted the view that the current cycle is the start of a normal multiyear recovery that could resemble the average 45-month expansionary phases that have typically followed a recession.

The previous consensus forecast of a shallow recovery has now been displaced by a far more optimistic projection. Aggressive fixed and variable corporate cost cuts (and the productivity gains and margin expansion that follow) are now being seen as providing the underpinning to a leveraged and positive impact on 2010 corporate profits. Next year's S&P 500 earnings forecasts are now moving toward $80 a share (as UBS estimated yesterday), a level that was unimaginable three to five months ago.

By contrast, I have argued that a number of nontraditional headwinds coupled with a weakened consumer would result in a degree of uncertainty and the likelihood that a wider range of economic outcomes are possible, some of which are not market-friendly. While I am respectful of Mr. Market, there is no message in the recent market upturn nor, more importantly, in recent economic releases that lead me to change my baseline view that market and economic challenges will rise anew next year along with the withdrawal of stimulus and the threat of higher taxes.

History shows that sentiment, forecasts and price targets can get intertwined; they can influence each other and can be detached from reality both in periods of depression and in periods of elation. The former occurred in March 2009 when the S&P 500 put in a generational low, and perhaps the latter is currently in the development phase.