We are in what amounts to a bear market rally. Many analysts and investors don't see it that way and complacency is back. US corporate earnings in the third quarter of 2002 were up 9%, ahead of analysts' downward-revised 6% expectations. The Republicans have taken full political control and will cement existing tax cuts and make new ones. And now the Federal Reserve has surprised the market with a big interest rate cut.
In a year's time, though, I expect equities to be lower than now and government bond prices to be higher. Some time in the next 12 months, the S&P500 will slip below 700 and the US 10-year treasury yield will head towards 2.5%. The dollar will weaken a little (until the European Central Bank cuts rates too) and then mark time. The big dip is for when Iraq turns out to be a messy campaign.
Alan Greenspan will go down in history as Mr Bubble - he loves bubbles and does not consider it part of his job to burst them. First he tolerated the equity market bubble. Now it's housing and the household debt bubble. Actually, tolerate is the wrong word.