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Global equities mark a post-recession high

The market cap of global equities has reached a new post-recession high this past week, thanks in part to the weak dollar. (U.S. equities are still about 3% below their April highs.) What's propelling things upward is anybody's guess, of course, but from my perspective this rally is in large part about things that were feared that didn't happen—like a double-dip recession or a deadly bout of deflation or more policy mistakes. The fundamentals—strong corporate profits, abundant liquidity, strong commodity prices, lower swap and credit spreads—have been looking good for quite some time.

True, the prospect of further central bank accommodation has been much-discussed of late and that could be a factor behind the rally as well. But I prefer to think that markets don't react well to impending policy errors, such as would be the case for QE2. Instead I think that in addition to cheering the bad things that didn't happen, markets also are reacting to the prospect of fewer policy errors going forward, and the elections to be held in 20 days are very likely going to make that possible. The Bush tax cuts have a good chance of surviving. Federal spending is very likely to slow down. ObamaCare could suffer arrested development. Cap and trade is a creature of the past. Washington is very likely to become less anti-business and with a little luck might even become a bit pro-business. The people are going to give a raft of new politicians a strong mandate to fix the economy, and that can only be done by turning loose the energies of the private sector.

There are lots of reasons to be optimistic these days.

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