2011 Outlook Based on Today's Surge in Stock Prices

In looking at various economic statistics and trends, things are looking up. For the U.S., Spring is always a time of optimism especially after a hard Winter.

Stocks are up substantially today.

The factors that concern me the most with regard to a continued bull market include the following:

1. What appears to be a civil war in Libya along with issues in Tunisia and Egypt are causing a significant refugee problem. If any unrest spreads to Saudi Arabia there will be a serious effect on oil markets.

In addition, the ongoing civil war in the Ivory Coast is important for Africa in general. Prices of cocoa are up about 20% since Dec., adding to commodity inflation.

2. Quantitative easing will end in June. Likely interest rates will increase within one year based on an analysis of Fed policy. Both of these actions will be a damper to an increase in stock prices.

3. There is an echo financial crisis ongoing for state and local governments. The municipal bond market looks shaky to me.

4. The "private" employment report recently published is a positive thing, however, there appears to be little correlation between this report and the government report due on Fri. I tend to trust the various government reports for a better picture of the employment situation.

The amount of anticipated improvement in employment is modest in comparison to the total amount of jobs lost since the 2008 crisis. Markets are losing perspective on what an improving employment market really means.

5. The Federal budget deficit looms large as a political issue. The deficit is huge but there is not unified resolve to make cuts. So called "austerity" is not favored by the majority of Americans.

The only solution appears to be significant economic growth. However, there is no clear path toward accelerated economic growth.

6. The exact changes happening in China in relation to a real estate bubble and inflation are not clear. If anything, China seems to be shifting more toward an authoritarian government.

In conclusion, the rise in stock prices might be short-lived. US markets always seem to get too far ahead of economic reality. Additional liquidity from the Fed is a factor in the current market.