Summary

• The market has been in a goldilocks zone over the past four years, with low interest rates, rising profits, and increasing stock buybacks.
• Even though these conditions may not continue, the market can be irrational.
• Currently, the market rally has a lot of momentum and there are no catalysts ahead to stop it.

The U.S. stock market has been in a goldilocks zone for a long time.

Because of an accommodating Fed, interest rates have been low, leading U.S. companies to issue a record $1.28 trillion in bond sales and spend a projected $914 billion in stock buybacks and dividend payouts this year.

Because of a loose labor market, wage growth has been slow, leading to record high corporate profit margins.

In addition, many market participants have rediscovered their ‘animal spirits’ and buy any dip with impunity.

On Thanksgiving, the U.S. economy got another present, this time from OPEC, who decided to keep oil production constant at 30 million barrels a day. OPEC’s decision caused crude oil to fall to the lowest levels since 2009.

The drop in crude prices is a gift because it provides more discretionary purchasing power to the U.S. consumer, who makes up roughly two thirds of the U.S. GDP. That extra spending will act as a stimulus that likely sends U.S. GDP higher.

Still, the world is not without its problems. Germany, the heart of the Eurozone, is growing at an annualized 1.2%. Japan, the world’s third largest economy, is in recession. Similarly, both the Russian and Chinese economies are decelerating very quickly.

Basically every major economy outside the U.S. is doing very poorly right now. This has caused the U.S. dollar to rally against the Euro, Yen, and Ruble.

Rationally, the market should not be rallying. The S&P 500 depends on Europe, Japan, and China for a substantial part of its profits.

Because the dollar is stronger and the major countries outside the U.S. are doing poorly, international earnings will weaken. Similarly, as the U.S. economy reaches full employment, the labor market will tighten and corporate profit margins will fall. As the Federal Reserve raises interest rates in 2015, many companies will issue less bonds and reduce their corporate buybacks, thus removing arguably the principle reason for the market rally.

With all that said, I don’t think the market is a short. The market might be irrational, but there are no catalysts to change the market’s mind. The ‘Santa Claus Rally’ period is rapidly approaching, and after that it’s the third year over the Presidential cycle.

The market has a lot of momentum right now. The higher the market goes, the more confident the U.S. consumer becomes through the wealth effect. Similarly, the higher the S&P, the more buying power the bulls have to buy ever more stocks.

The market has been historically very good at rationalizing equity prices no matter how absurd they may be, either through relative valuation or through the greater fool theory, and this time is no different.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.