As anyone who has read my scribblings over the last few months knows I've been skeptical of this rally since the beginning of the year. The economic data has been deteriorating pretty steadily in manufacturing and the consumption side of the economy hasn't exactly been gangbusters either. Employment has continued to expand at an anemic rate but incomes have been stagnant at best. China is slowing down as its credit bubble appears to be coming a cropper. Emerging markets and the other countries that have benefitted from selling commodities to feed China's growth are starting to feel some pain. You can see this pretty starkly in the currency markets where the Aussie and Canadian dollars and the Brazilian Real have fallen recently. Europe is still in recession/depression and while it may have hit bottom, future growth is hard to imagine without some major structural reforms. Japan is growing again, which is good news, but there is doubt about its sustainability. I could go on but you get the picture. I know the bear case and I'm invested accordingly. What that means for me is that I'm holding a larger than normal cash position and I'm more likely to sell than buy. I'm still finding some individual names to buy but when I look at the major stock averages, I have a hard time trying to make a bullish case.

It seems to me that higher stock prices from here are dependent on either interest rates staying very low for a very long time or an acceleration of economic growth (and therefore earnings growth). If interest rates stay depressed - whether because the Fed forces it or just because they do - one could make the case that stocks can continue to rise on multiple expansion since we can use a very low, long term discount rate. If economic growth accelerates and record profit margins are maintained one could make the case for better earnings growth and therefore higher stock prices even if multiples don't expand. The problem as I see it is that if growth accelerates interest rates are almost certain to rise too which means the discount rate on those future earnings rises and that puts pressure on multiples. Growth would have to accelerate enough to offset that rising discount rate plus some for stocks to keep going higher. On the other hand, if rates do stay low there would seem to be a limit to how high stocks can go simply because dividend yields are already about the same as the 10 year Treasury note yield. Will yield seeking investors continue to buy stocks, with all the risks that entails, if dividend yields don't give them a pickup over Treasuries? 

So if you are bullish and think stocks can keep going up, what are you basing that on? Do you think growth is about to suddenly jump? If so, why? Do you think interest rates are going to stay low forever a la Japan? If so, is there a limit to how high stocks can go based on a very low discount rate? If you think rates are going the way of Japan why don't you think our stock market will too? So somebody help me out here. What is the bullish case for stocks?