Many investors (and analysts for that matter) mistakenly believe that stocks are driven strictly by the underlying fundamentals, such as GDP, employment rate, interest rates, etc. While it's true the economy can have an impact on the stock market, it's not the main reason stocks move higher or lower. The main driver of stock prices is liquidity - either excess or lack of.
If there is excess liquidity in the system, some of that cash finds its way into stocks and other assets (real estate a few years back, remember that?). One important by-product of a solid growing economy is a liquid market, which means stocks rise. However, the economy itself is only impacting the market indirectly. The reverse is usually true in a bad economy. Poor economies lead to a liquidity crunch (think saving and paying down debt) and stocks usually fall.
To understand the concept of liquidity vs. the economy as a driver of stocks, simply look at the Nasdaq Composite, which was recently trading above its 2007 high. So we ask ourselves is the economy as good or better now than it was in 2007? Obviously it's not better - so if the economy were truly the driver, then the markets would be substantially lower, since things are worse than in 2007. So why aren't the markets lower? The answer is liquidity.
Since 2009, the massive money printing from the TARP bailout, the ECB's LTRO, QE1, QE2, Operation Twist, and so on, have provided the liquidity to keep stocks moving higher. In addition, lower interest rates have allowed corporations and consumers to borrow funds, which in turn creates more liquidity. As far as we can see, this liquidity is one of the only factors driving stocks higher. The amount of liquidity injected into the system in recent years has been beyond comprehension - trillions and trillions of dollars.
That liquidity usually gets confused with "real" money, and gets spent as actual money, which drives stocks and other assets higher. "Real" money is actually money created when an economy produces more than it consumes. In other words, real money comes from production and economic growth. In the current world, there is limited production and growth; so the prime mover driving asset prices is the printing presses.
As long as the liquidity is there, it's supportive to global markets, especially with interest rates so low. But what happens if the printing presses stop? Where will the liquidity come from? If we assume it will eventually come from production and growth, what happens when the global economy can't grow at a rate fast enough to produce the same amount of liquidity that governments are currently providing, then what? Wish I knew the answer.
