Suddenly, things are just swell!

Over the last month, stocks have absolutely blasted off with one of the most powerful moves in years. More precisely, in this century the only months with bigger gains in the S&P than last month’s 8.3% were March 2000, October 2002, March 2009, April 2009, September 2010 and October 2011.

There is no ‘because’ – as far as I can tell, there is little coherent reasoning behind the rally. Economic data has been generally weak; there have been positive signs too but the bad signs have been getting worse faster than economists have been expecting. Nothing is collapsing, but we are talking about a market that is overvalued on most major metrics. “The economy is not collapsing” is not a strong argument for why we’ve added 10% since the beginning of October.

One fascinating argument I have heard advanced concerns the Fed’s recent hawkish rhetoric (for the record, I do not expect this to result in an increase in interest rates in December, but consider it so much wind). Stock market bulls for years have used the liquidity argument for a reason to buy stocks. But now that the Fed is preparing (or trying to make us think it is preparing) to hike rates, I read about how that’s bullish for stocks because it signals a return to normalcy. Really? So by similar reasoning, if the Fed enacted QE4 instead it would be bearish. How convenient that the logic of how liquidity helps stocks got turned around 180 degrees right about the time the Fed has few options before it other than the question of when to turn 180 degrees.

Investing, of course, is famously not about selecting the prettiest girl in the room but about selecting the girl that everyone else thinks is the prettiest. If you can get ahead of the screwy logic correctly, you can do quite well. I am awful at doing this. I simply can’t make myself think in this kind of twisted way, which is why I am a systematic value-tilted investor.