By Tom Bradley

People are having trouble with this rally. Indeed, I admitted to being uneasy about the speed and magnitude of the market’s move in a recent post.

What’s spooking people is that it’s happening at a time when the economy is in the dumper and it’s not clear how we’re going to get out. Repeatedly I hear people saying, “The market’s move isn’t supported by what’s going on in the economy.” Indeed, as I write this, an email from Advisor.ca flashes across my screen saying that the economy shrunk 1.4% in the first quarter.

But as investors, we have to remember:

• The market looks forward. The past influences investors’ views, but future profitability drives stock returns.
  
• Very little of a stock’s valuation is derived from current earnings, or losses. When investors take ownership in a company, they are buying a future stream of earnings and dividends. The first three or four years of that stream accounts for about 15% of the value, while the other 85% is derived from what happens in years 4 and beyond. Too often investors get mixed up on their emphasis – 85% of their focus on the next year or so.
  
• The market doesn’t need economic news to move. The recent ride could be explained by the fact that stocks got oversold and were trading at silly valuations...silly cheap. At that point, perhaps, the urgency factor moved from the sellers (who were getting tapped out) to the buyers (who had lots of money to spend).

Then again, maybe there’s another explanation. The reality is that the economic and market landscape is so complex, we can’t ever make a definitive bet on what will happen in the short term.

This market move shouldn’t surprise investors. And nor should another 10-30% move - up or down - over the next X months.