The Stealth Stimulus Rally

The real question becomes the threshold of pain required for the government to institute one of these programs. I have noticed that the level of pain required is lessening as we approach the election year. This is not unique to the current situation and seems to be following the familiar election year cycle.

Forecast: 2012 Will Depend Upon Government Stimulus

If there is not a major shock to the global financial system such as the ones described above, the rally should continue. We should not exceed the spring highs in any case without a government stimulus package.

With regard to 2012, it will depend upon government stimulus. If the Fed acts, we will either be in the trading range or rally higher depending upon the size of the stimulus. Any of the shocks described above could damage the financial system quite substantially. As long as the Fed and the government are able to counteract these threats successfully, the situation may not deteriorate massively.

These threats are significant. If the Fed makes a mistake like 1931 or 1987, serious problems can occur. The United States equity markets are particularly vulnerable since many of the sources and solutions to these problems are largely outside of our control.

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