From the March 01, 2011 issue of Futures Magazine • Subscribe!

Can equities continue to climb wall of worry?

Larson says stocks as a whole are slightly overvalued. "Our median stock is approximately 6% overvalued," adding that there is more value in large-cap stock as small-caps outperformed them over the last 18 months.

Because of the massive layoffs throughout the crisis, companies are leaner than ever and pushing their workers to do more with less. "You’ve got a skeleton crew, the employers whipping their guys [to do more] and now demand is starting to creep back in," says Jeffrey Friedman, senior market strategist at Lind-Waldock.

The result is companies that are producing enough to meet demand with a very productive workforce and access to cheap money. "Companies have laid off people and what they are doing is producing the amount of goods necessary to meet demand. We’re not seeing demand increase. A company that makes a product is only making what they know they can sell and [are] hoarding cash," Springer says.

He doesn’t see this as a positive as companies are not re-investing that cash.

While this scenario explains, in part, why equities have been so strong since the March 2009 low, it won’t support further strength without more tangible economic growth.

A lot hinges on consumer demand. Most analysts say that is beginning to return, except for housing. One factor for demand is consumer confidence; if consumers have no confidence in the economy or the safety of their jobs, then demand will diminish.

In January, the Consumer Confidence Index (CCI) rose to 60.6 from the December reading of 53.3. While an increase, the January reading is still far from the 90 that signals a healthy consumer mindset (see "Good, but not great").

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