Fresh markets highs! What now?

Now that stock prices have recovered from their March lows to all-time highs, it's time to admit that I was wrong about my excess cautiousness. I present a new framework for analyzing the stock market. While the new framework is useful for explaining why the major US market indices have reached fresh highs, it does not necessarily have bullish implications.

My previous excessive cautiousness was based on two factors, valuation and a weak economic outlook. The market is trading at a forward P/E ratio of 22, which is extremely high by historical standards. Moreover, it was difficult to believe that the economy and stock prices could recover that strongly in the face of the second worst economic downturn since the Great Depression.

While there has been much discussion over the letter shapes of the recovery, whether it's a V, W, L or some other shape. The reality is a K-shaped bifurcated rebound. This bifurcation is occurring in two separate and distinct dimensions, the stock market and the path of economic growth.

The K-shaped recovery analytical framework has important implications for how investors should view the market's future outlook.

The full post can be found here.