Having spent much of the day attempting to explain the difference between nominal and real wealth creation and that asset price movements are different to the economy, we turn back to Michael Cembalest of JP Morgan to set the story straight on one of the most frequently cited reasons for the rally: "It's the economy, stupid". Many argue that the US economic expansion is the real driver behind this most recent USD-based equity performance. It is also hard to disagree that there are positive signs, but as the JPM CIO opines, let's be realistic: US growth is projected to be ~2.5% for 2012. That's better than last year's 1.7% disappointment, though both remain well below the 'trend' 3% growth that lost George HW Bush the 1992 election. Some argue that profits are the driver, and they are doing well, but their apparent strength (that still managed to relapse in 2010 and 2011) is masked by a sad truth that gets little exposure.
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Looking at where those profits come from shows that if labor compensation grew at trends comparable to prior recoveries, a big chunk of current-cycle profits would disappear (quicker than a rehypothecated 2Y BTP under Corzine's watch).
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Cembalest summarizes that while this doesn't mean these profits are entirely illusory; it does mean that they come with related costs: such as weak household income and bloated government budget deficits - which have a cost as well (don't they?).
Some argue that European growth surprised positively in Q4, but the surprises were confined to France and Germany. The periphery is in recession and expected to remain that way, and the Netherlands had a small decline as well.