Howard Marks of Oaktree Capital said, "In the real world things generally fluctuate between 'pretty good' and 'not so hot.'  But in the world of investing perception often swings between flawless and hopeless." Well, put. Last fall the market fell as if the economy and earnings were going to tank. The financial backdrop was hopeless, some believed, until Christmas when stocks took off en route to record highs amid a backdrop some saw as flawless. 

The S&P 500 is now plus 15 percent year-to-date, not counting dividends. No foreign markets are doing nearly as well nor are they close to all-time highs.  One reason is clear. Earnings have grown far faster here than overseas and are now approximately 10 percent of GDP versus a more typical 6 percent.  The corporate tax cut and with it strong investment incentives is one reason earnings are strong. 

On CNBC Blackrock CEO Larry Fink spoke of a "melt up" sparked in part by hedge funds, which have been woefully underinvested in stocks for a long time. Hedge fund stockholders usually stay invested when the market falls. They understand that prices can be volatile. But when their hedge fund is not invested and stocks rise, they don't understand. They leave. So in the money-management business, there is more risk being out of the market than in, especially so given the market's clear upward bias. Hedge funds are learning that lesson again; successful individual investors learned it long ago.

As for the melt up Fink expects, I say he's a little late. Stocks have been in a slow-motion melt up since Christmas, in good part because in the fourth quarter investors had "baked in" a very negative outlook for the economy and earnings, both here and overseas. Marks would say investors saw it as hopeless. They have since reconsidered. First-quarter earnings for most S&P 500 companies exceeded estimates. Either the underlying economy is stronger than many expected, or management had set the bar low.  In truth, the answer is some of each. 

As recently as a month ago, first-quarter GDP growth was expected to be virtually flat, but then we learned that growth was a strong 3.2 percent, boosted in part by inventory re-building, which by definition cannot be an ongoing factor. Take inventory re-building out and the number would be 2.5 percent, the same as final sales. Inflation was running below 1 percent. A flawless environment? Not quite. Let's just call it very good.