Is “Melt-Up” The Operative Word?

April 22, 2019|2:02pm


We’ve been talking lately about the idea that big hedge funds and systematic traders have been caught on the wrong side of the stock market’s recent run for the roses. The thinking is this fact alone could account for the lack of downside volatility and the relentless dip-buying that has been occurring this year. And since there have been no real declines to speak of in 2019, some argue that the current trend can continue.

For example, there was a lot of talk last week about stocks “melting” higher in a slow and steady fashion from here. BlackRock’s Larry Fink kicked things off by suggesting that there is a greater risk of a melt-up than a meltdown. Fink opined that the rally in stocks, which he points out is global in scope, may have further to go due to the record amount of cash on the sidelines and the fact that rates are not moving in the direction that had been expected.

Fink argues that many investors were looking for rates to rise this year as central banks around the world either continued or began to hike rates. But with global central bankers having pivoted to recognize slowing economic growth, investors have been forced to charge back into bonds. This has resulted in rates falling/bond prices rising and our indicators suggest that the bond market has become overbought and extended from a valuation perspective. The head of the world’s largest money manager further suggests that this has created a “shortage of good assets” for investors, which “could ignite a melt-up in the global equity market.”

From my seat, this view makes sense as I have long been a proponent of the idea that the money flows are one of the primary drivers of stock prices. And since the beginning of time, when too many dollars are chasing too few goods, prices tend to rise over time.

It is also worth noting that the backdrop for stocks looks to be improving. Not in the way that the tax cuts caused in 2017. But in a more subtle, more sustainable way.

Green Shoots

For example, if you look hard enough, you may see that there are some “green shoots” in the global economy starting to poke through. While the news/data hasn’t been overtly positive, it is encouraging to see that global manufacturing PMI’s have stopped falling, that the global OECD leading indicator was unchanged last month after thirteen straight months of decline, and that NDR’s Global Recession Probability Model moved lower last month for the first time in nine months.

Earnings Recession? What Earnings Recession?

Next up, the much ballyhooed “earnings recession” may be over before it began – or may be priced in already. The bottom line is that while the earnings season is still young, the results have been a bit better than expected.

Doing Just Fine, Thank You

In addition, it appears the demise of the U.S. economy has been overstated. While the Atlanta Fed’s GDPNow model had been projecting a paltry gain of just 0.3% for US GDP a couple months back, the projection now stands at a healthy 2.8%. It turns out that consumers like to spend and that unless there is an impending crisis not to do so, Mr. and Mrs. John Q. Public will keep shopping for stuff. And since more than 70% of the U.S. economy is driven by consumption, well, you get the idea.

China Stimulating

Looking around the globe, it is also positive that the Chinese are stimulating their economy again. I won’t bore you with all the measures being taken, but investors need to remember that China is a managed economy and that officials aren’t likely to stand by and let the world’s second largest economy founder for too long before taking action.

Sideways For Some Time Now

And finally, from a big-picture perspective, it is important to keep in mind that while the action has been hot and heavy at times, stocks have effectively gone nowhere since the beginning of 2018. Yet, earnings grew by 21.75% in 2018 and are expected to be 32.5% higher than they were at the end of 2017 by the time New Years Eve 2019 rolls around.

Now consider that the S&P 500 has advanced just 8.6% since the end of 2017 and it is fairly easy to argue that there is plenty of room for additional upside. In fact, if you apply the same multiple that was in place in early 2018 to consensus Operating Earnings expectations for this year (currently at $164.99) my calculator suggests 3500 on the S&P within the next year or so isn’t an unrealistic expectation.

Granted, I am talking about the big-picture here and it goes without saying that a garden-variety correction could occur at any time and for almost any reason. But my guess is that any meaningful correction will continue to be bought in the near-term.

The Takeaway

So, as long as big money continues to seek a home, the economy continues to grow, and corporate America continues to do what it does best – make money, I’m of the mind that the path of least resistance for the primary trend of the stock market could continue to move from the lower left to the upper right on the charts.

Thought For The Day:

You can easily judge the character of a man by how he treats those who can do nothing for him. -James D. Miles

All the best,
David D. Moenning
Chief Investment Officer

David D. Moenning


At the time of publication, Mr. Moenning and/or Redwood Wealth Management, LLC held long positions in the following securities mentioned: None

Note that positions may change at any time.


NOT INVESTMENT ADVICE. The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as investment recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

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Mr. Moenning may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.



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