It's the second week of January, 2020,

and the US stock market is hitting an all-time high.

And in recent weeks and months the momentum

has been particularly strong.

All of which raises a question: if slowing

earnings growth, a soft industrial economy,

a simmering trade conflict, military conflict in the Middle

East, and sky-high valuations aren't

enough to slow down the stock market, what on earth is?

Here you have a five-year chart of the S&P 500.

And over those five years, the index is up 60 per cent.

That's 80 per cent if you include dividends.

And yet, over just the last year,

think of all the things that have happened.

Over the year as a whole, we have seen virtually

no earnings growth in aggregate among S&P 500 companies.

Over just the last four months of the year,

here, we have seen four consecutive months

of contraction in the industrial economy,

according to the ISM surveys of companies.

Here, of course, just in recent weeks,

we've seen conflict with Iran.

At the same time, though, the valuation of the stock market

is near its all-time peaks.

The cyclically adjusted price to earnings ratio

is a dizzying 31.

Let's not forget also what happened in September, when

money markets froze up and the Fed was forced to come

in and inject liquidity.

So there's been a tremendous rally, but not

that much good news.

And in fact, the rally, while it's been sharp,

has not been deep.

About a quarter of the stock market returns last year

were taken up by just five big stocks, the likes of Apple,

Microsoft, Facebook, Google, and so forth.

Now, none of this, by a long stretch,

amounts to a good argument for why

we should have a stock market crash anytime soon,

or even a steep decline.

It does, however, make you wonder

whether this furious rally is sustainable.

Now the stock market bulls have a very simple argument

in support of their optimism.

It is not only one word, it is three letters long,

and those are F-E-D. The bulls believe

as so long as the Fed keeps monetary policy loose and rates

low, the stock market will continue to go up.

Well, maybe.

And in fact, following the Fed, over not only the last five

years but over the last decade, has been a great plan.

A word of warning though, historically, there

is not a clear relationship between low rates and stock

valuations.

In fact, the relationship has been all over the place.

The stock market looks strong.

The economy, in some respects, such as the consumer area,

remains robust.

The Fed is, in fact, powerful.

It is not, however, all powerful.

Happy 2020.