This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.
The after-effects of the volcano in Iceland and the SEC lawsuit against Goldman Sachs seemed to take a back seat to positive earnings results yesterday. I discussed the effects of these two stories with CBS3 in Philadelphia this morning-the conversation took place before Goldman blew away estimates on first quarter earnings.
These two volcanic eruptions over the past week have gotten some investors thinking: maybe this rally is a little long in the tooth. Coming into last Friday's session, before the SEC bombshell, stocks had gone 38 trading sessions, or 51 days, without a 1% decline. Are these two exogenous events enough to test the bulls? I don't see it just yet.
Here's what we know so far: the bull market in global stocks has entered a new phase: one that will be driven by economic growth and corporate profits, rather than government-sponsored liquidity programs. If you believe that the economic recovery will be thwarted when liquidity measures wind down, then you should trim your exposure (nobody ever went broke taking a profit, right?). But, if you believe that the economy is in full-fledged recovery mode, then volcanic eruptions may provide an opportunity to initiate or add to existing stock positions.
What about rising interest rates? There's no doubt that rates are headed higher. But even rising rates might not stop the bull. In the past, we've had periods when stocks can ascend in conjunction with rising federal funds rates. That condition has occurred when rates go up due to improving economic conditions and solid corporate profits. However, when officials increase rates to tamp down growth, it's usually a bad sign for stock investors.
This is not to say that we can't have a correction. In fact, bulls should be rooting for a classic 10% drop to shake out the non-believers. The way the Goldman case could be the catalyst for such a move would be if the SEC were to successfully expand the investigation beyond one instance of alleged fraud at one company, to a more widespread indictment of bunch of companies-like the equity research settlement of 2003. So far, that possibility is remote, but so too was the idea that the SEC would ambush Goldman with the filing, so stay tuned!
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