A Step Back & A Melt Up

Tuesday, January 16, 2018 - Upward momentum continued to drive US Equity Markets which set new highs last week with the S&P 500 and NASDAQ Composite closing at 2,786.24 and 7,261.06 respectively for a weekly gain of 1.57% and 1.74%. More impressively, the indexes are up YTD 4.21% and 5.18% respectively.  Investors, sensing global reflation with the US, Europe and Japan in a synchronized global growth cycle, bid up Consumer Services, Energy and Industrial stocks. In the US, tax cuts not only will increase corporate earnings, but should act as the first act of the long awaited fiscal stimulus while a national infrastructure package will be the Second Act.

Such upward moves in the equity markets beg the question “are we in a Melt Up in stock prices?”  Ed Hyman has observed that historically in the 20^th century, investors bid up stock prices rapidly during periods of low inflation and strong economic growth, i.e., 3% or better. He observed 3 Super Bull Markets since 1900 as follow:

• US - The Roaring 20s              1925-1929
• JAPAN  The Great Bubble      1985-1989
• US  The Tech Bubble              1995-1999

During these periods, markets rose some 3x over a roughly 5 year period. In each of these periods, markets enjoyed a flood of liquidity and ultimately a rise in interest rates killed the bull market. Having said that, need we look no further than to today’s mania in Bitcoin and other cryptocurrencies to see a flood of liquidity seeking fast returns?

If we are in a Super Bull Market, investors should be prepared to buy on any pullbacks but keep a cautious eye on interest rates. Alternatively, if we are in the last Act of this bull market, then one should be raising cash.  We think odds are that we are in the former scenario but would not be surprised to see quick sharp selloffs due to geo-political flare ups. As the global economy prospers, folks start thinking of how dissatisfied they are with the status quo, hence geo-political market surprises.

A citation in this week’s Barron’s on the research of Louise Yamada on interest rate cycles caught our eye to support the Super Bull Market theory. Her research essentially indicates that interest rates are long cycles ranging from 22-37 years. During periods of rising rates coming off historically low rate levels indicate that deflationary pressures are abating, allowing rates to gradually rise. Inflation, however, is not yet apparent.  This typically takes years to unfold. Hence, if we are here in this point in the cycle, then we have some time to go before rates rise high enough to dampen equity markets.

These trends show that research tools are increasingly needed to evaluate the vast set of opportunities in the ETF marketplace. Investing in ETFs requires a new approach to macro investing, one in which investors are just beginning to realize. Investors and traders are advised to check the ETFG Select List and the ETFG Quant Movers daily for revisions to our ratings to gain insights into the latest news developments

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