Are We Witnessing a Melt-Up? — US Stocks Break Out
In today’s Money Weekend…US stocks break out…bond yields the only wild card…Roaring Twenties are back…and more…
The US stocks had a solid performance this week with the S&P 500 breaking out to new all-time highs after treading water for the last few months.
There is literally nothing stopping the S&P 500 from continuing to trend now. I have one final point of resistance around here (about 1–2% higher than where it is now), but if that doesn’t cause any trouble there is nothing to stop the continuing melt-up.
The increased detail released about the immense stimulus proposed by US President Biden has been the catalyst for the latest bump in prices.
From Zerohedge.com, here’s a breakdown of the US$2 trillion proposal:
- USD 180bln for research and development
- USD 115bln for roads and bridges
- USD 85bln for public transit
- USD 80bln for Amtrak and freight rail
- USD 174bln to encourage EVs via tax credits and other incentives to companies that make EV batteries in the US instead of China
- USD 42bln for ports and airports
- USD 100bln for broadband
- USD 111bln for water infrastructure
- USD 300bln to promote advanced manufacturing
- USD 400bln spending on in-home care
- USD 100bln in programs to update and modernise the electric grid
- USD 46bln in fed procurement programs for government agencies to buy fleets of EVs
- USD 35bln in R&D programs for cutting-edge, new technologies
- USD 50bln in dedicated investments to improve infrastructure resilience
- USD 16bln program intended to help fossil fuel workers transition to new work
- USD 10bln for a new ‘Civilian Climate Corps’
Biden plans on paying for most of it through increased taxes on corporates. The plan to raise company taxes from 21–28% should have seen an immediate negative impact on valuations but the market has taken it in its stride.
The positive impact on growth from the stimulus is obviously a bigger drawcard than worrying about the impact to after tax earnings.
Of course, it has to be said that we are a long way from the stimulus becoming fact. There is still a long journey to get the proposal through Congress and the details may change markedly from where they are now, so the market is probably taking a wait-and-see approach.
Bond yields the only wild card
US 10-year bond yields have managed to hold the line during the week but there is no indication that the sell-off in bonds is over yet. The yield has bounced around between 1.6–1.7% for a month and the market must have liked the fact rates fell after the stimulus announcement.
Long-term interest rates in the US are the final market signal that hasn’t been completely corrupted. If the market becomes concerned by the level of stimulus given to the economy by the US Fed and Biden it will show up in long-term rates.
There is still plenty of bond supply to come despite the fact Biden plans on increasing taxes to pay for part of his plan.
But the Fed hinted during the week that they were considering upping their purchases of newly-issued 20-year bonds. That saw a drop in yields at the long end.
NY Fed Executive Vice President Lorie Logan said that the Treasury’s introduction of the 20-year Treasury bond in May of last year had ‘increased amounts outstanding around the 20-year maturity point’.
She went on to say, ‘As a result, we plan to make minor technical adjustments to our purchase sectors and increase the frequency at which we update purchase allocations to remain roughly proportional to the outstanding supply of nominal coupon securities and TIPS.’
It’s not exactly an announcement about yield curve control but it was enough to see strong buying in the long end of the yield curve.
There has also been some offshore buying of US bonds as rates rose to a point where European and Japanese investors could get a fair return even after hedging the currency risk.
But those demand side factors won’t be able to keep rates down if the market gets a whiff of inflation and the various inflation indicators have all been pointing in the same direction. Up.
With US 10-year bond yields at 1.6%, you are receiving a negligible yield for 10 years after inflation. I’m sure you can imagine the rout in bonds that could occur if the market decides inflation is going to break out above 2–3%.
The last quarter has already seen the worst returns for bonds in years and there will be a flood of investors running for the exits if inflation indicators deteriorate further.
But that is the only thing I can see out there that could possibly put a dent into the market’s vertical rise.
Roaring Twenties are back
Expected GDP growth figures continue to ratchet up to immense levels. As long as US bonds play nice, I reckon we’re looking at the chance of a serious melt-up in prices.
If you were ever keen to get involved in trading the markets, then I reckon now is not a bad time to dip your toes into the water. As long as you manage your risk effectively, I think the next 6–12 months could be great trading conditions.
My own style is quite risk-averse and I use trading techniques to enter longer-term positions that I think have strong upside fundamentally. But my colleague Callum Newman has a different approach that might float your boat.
He is a short-term trader who likes to pounce on opportunities, ride a quick spike on the back of stock-specific catalysts that he sees coming and then he rings the cash register.
For Money Weekend
P.S: Promising Small-Cap Stocks: Market expert Ryan Clarkson-Ledward reveals why these four undervalued stocks could potentially soar in 2021. Click here to learn more.