disclaimer.. I'm just making this up.
With the sub-prime mortgage mess many people are wondering why the US stock market continues to soar. For the past several years the US economy has been driven by gains in the housing market. People borrowed against these gains and spent freely, this in turn resulted in more gains. That is, until prices started coming back to reality. I don't see a gain in home prices for over 10 years, unless inflation gets out of control. Why? In the DC area where I live, government workers buy houses 40 miles out of town because that's all they can afford. But.. in the coming years the baby boomers, who live close-in, are going to try to sell their homes and there will be no one who can afford them. Plain and simple, valuations are out of control in many areas.
This brings us to the fact that the stock market is soaring even as the economy is at risk of recession. You only need to look at what started the housing boom to see what is happening. Back before the markets crashed in 2000 the connected people with money started shifting their stock market gains into real-estate. After the crash, the folks who got crushed in the market pulled what they had left and started putting it into real estate. Now the real estate market started to gain and everyone was getting rich. At this point the momentum would carry it for years. Rockefeller knew it was time to get out of the market when his shoe shine boy was giving him advice but in real estate the momentum carries 2 years after this point.
So here we are, the well connected people have been moving money out of real estate and into the stock market for the past 3 years. Now real estate investors who aren't broke are also moving their money into the market. Further fueling the market is weak dollar, it is making US stocks look cheap so foreign investors are also moving into the market. So how long does it go up? I'd say another week but I also figured the housing market was at its peak in 2002. Since markets seem to move on emotion instead of logic, I think we can say that the US market will rise 20% a year through 2010. :-)