Is This Market Going To Break?

The stock market, if nothing else, has been resilient in the face of some pretty steep risks. Granted, on a forward looking earnings basis, the market is very cheap. But, given the risks, this should not be surprising. What traders and investors should be considering is what is priced into this market? Is a Greek default and EU contagion priced in? Is a brutal recession in the United States priced in? What about the grandaddy of all the scenarios - Greek default leading to EU contagion where major economies cannot access their bond markets leading to devastating recessions in the United States and Europe combined with a severe contraction in China? I don't think that this is priced in, but maybe you do? The real kicker is the fact that in such a scenario, the normal monetary and fiscal "remedies" are not going to be available. In the United States, interest rates are already at record lows, fiscal stimulus has not worked, and quantitative easing has been ineffective as well. The rest of the developed world is also drowning in debt, so their hands also appear to be tied. Wall Street has the unfortunate habit of whistling while Rome burns, so to speak. Need I make the potential scenarios more bleak? Consider this - in 2007 and 2008, NONE of the so called "authorities" saw it coming. In hindsight, it is almost unbelievable, but next to NO ONE thought that we were on the precipice of systemic meltdown. Bernanke said that the sub-prime crash was "contained." Do you remember that? He still has his job. Wall Street analysts were projecting that the S&P 500 was going to end 2008 at between 1,520 (low estimate from Morgan Stanley) and 1,680 (high estimate from Strategas Research). Goldman Sachs'

and Citigroup

both had end of year S&P 500 targets of 1,675! Bank of America

was at 1,625, while J.P. Morgan

predicted the S&P would end 2008 at 1,590. In reality, the S&P closed the year at 873 and proceeded to make a low of 666 in March 2009. What about the politicians? Surely, they saw the crisis coming, right? Yeah, not exactly. They were the least informed of all. According to some in Congress, they were told if they did not pass TARP there would be martial law in America. Some, it would seem, were completely incapable of judging the situation from any kind of objective perspective, and they responded like the proverbial "deer in headlights." Not a pretty picture, if you recall. Are we heading for a repeat scenario? Who knows, but given the risks, it is not hard to understand why investors are a little spooked. Given the current valuation of the S&P 500, however, it is going to take more than just fear and paranoia to drive the market lower. For the collective good, let's hope that we don't get the dreaded catalyst, but if it happens, don't be surprised either. The warning signs are all there, if you are looking...