The ‘Melt-up’ Idea Floats Again


And so we come to a quiet period. The market will be closed on Good Friday and Easter Monday. It’s shut down next week for Anzac Day, too.


It’s nice to disconnect from it all from time to time. I can’t imagine too many traders or fund managers making important decisions. They’re probably all on holiday.

That doesn’t mean we can’t put the time to good use. It allows us some space to make sure we’re on the right track in terms of strategy.

Today’s Profit Watch puts a steady hand on the wheel as we set course for the next quarter and beyond…

Our thesis this year was that US stocks would come back from the big drop they took late in 2018. This sets a nice tone for global markets, including Australia.

That’s played out. US stocks are now pushing back close to all-time new highs. The S&P 500 is up over 15% for the year.

This could be building the final launching pad before a market ‘melt-up’.

That’s according to Larry Fink. This isn’t some buffoon with a big mouth. He’s the CEO of the world’s biggest asset manager, BlackRock.

That puts his finger well on the pulse of what’s happening.

He says he’s seeing record amounts of cash on the sidelines — and retail investors’ tentative and fearful psychology is driving them to pull money out of the market.

That doesn’t square up with a rising market, as we have currently.

Bull market? You ain’t seen nothing yet

It appears we can partly put this down to the amount of buybacks going on currently.

Generally, these reduce the number of outstanding shares. Any shareholders own a bit more of the overall pie afterwards.

One research mob says US companies bought back $286 billion of their own stock in the first 90 days of 2019.

The figure could go as high as US$1 trillion by the end of the year.

Check out the upward trend…

Source: FactSet

Here’s the implication.

All that money on the sidelines that Larry Fink is pointing out could pour into the market as it breaks into fresh, historic, all-time new highs.

That would add a second turbocharge to the buyback trend.

That’s the way I see it playing out — but I could be wrong. And it won’t be a smooth ride even if it happens.

One wonders what the big players in the fixed income market are thinking.

This could be very important…

Watch the bond market for signs of a shift

Recall that last year, it was taken for granted that interest rates would keep rising in America.

That’s no longer the case. But the first hints of wage inflation are coming through in the US.

Some of the companies that have reported this quarter have noticed an impact on their costs from this. That’s a concern for their earnings outlook.

But it’s a headache for the bond guys, too. Inflation eats away at their real return. Wages and energy (oil) are up in 2019. Both could go higher.

Is this risk priced into the current interest rates? I’m not sure it is. But I’m not so cocky to assume I know more than the market on this front.

But it at least appears plausible for investors to shift money from the fixed income market to the share market as they begin to worry about rising prices.

You’re not getting much return from a 10-year bond that pays 2.59% anyway.

Here’s something that I saw the other day. Many pension funds in the US that serve individual states (i.e. public employees of, say, Illinois) are underfunded.

This means their liabilities (the money they’re on the hook to pay out to retired teachers, firemen, etc.) is greater than their assets.

This is despite the fact that the US share market has been a bull market since 2009.

This is going to pressure the pension funds to do one of two things, or some combination of both. One is to try and cut down the money they pay out. That is politically difficult.

The second is to reach higher up the risk curve to try and juice their returns.

They are, in a very real sense, collateral damage from the central bank’s policy to pin interest rates so low.

These pension funds need growth of 6% a year. They can’t make that kind of return in the ‘safe’ market of US government bonds.

That means their allocation to stocks could become much higher than previously, or even in the way they prefer.

It’s another reason to think the US bull market in equities isn’t quite over yet.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch