“Hey, the stock market had it’s best month in a really long time! We must be out of the danger zone!” Yes, the S&P has had it’s best month since 1974, but this is no excuse to be blinded by the representativeness heuristic. Rather, I feel as though rigorous analysis should be performed before such a large conclusion could be drawn.
Much of this optimism draws from the fact that economic data has mostly outperformed analyst estimates. But I like to take a more simple, intuitive approach: has the largest problem plaguing the economy been solved?
The answer here, is partially. Thus, I would say this market should be approached with constrained optimism. Despite the equity markets rallying, lets not forget about the sovereign debt markets. The recent 50% write-down of Greek debt and increasing austerity measures have brought the government further away from default. Throw in a recapitalization of European banks, and you have a good short-term solution.
I would have to say that equity markets are overly optimistic, though. The sovereign debt markets haven’t shown the bullish attitude equity markets have been showing, and we must remember, this is only a short-term solution. Notice all three of these actions are not direct solutions to the debt crisis, but rather policies that buy time for the solution to be set up. However, this does give time for our financial institutions to strengthen their capital positions, and more time for Greece to find a solution to increase their debt solvency.
Of course, leave it to short-sighted financiers to shortsightedly invest as though the crisis has been resolved. Hopefully, they are not using heuristics to cut corners, and reach hasty conclusions. We have the momentum of strong Q3 results behind us, but there is nothing to stop another erupting crisis from taking that momentum away.
TL;DR: The success of short-term solutions is currently being reflected in equity markets, but a stable long-term resolution has yet to come. Invest with constrained optimism.