Secular Bull Update: Spring thaw could become a melt-up


We first raised the idea of a market melt-up in our Feb. 28 piece, “Connecting the dots—near-term market risk is to the upside.” Since then, the market is up a modest 3.5% even as Russia has occupied the Ukraine, China news remains soft, the Polar Vortex continues to grip much of the country and the Fed suggests tightening may come a bit sooner than the market was expecting. But on my way to an investment conference in New York City yesterday, I spied the first daffodils of spring pushing their way up through the cold earth. With an optimist’s heart, let me make the case for a possible spring melt-up on this, the first day of spring.

  • Yet another sky doesn’t fall. Market headlines have been dominated for weeks now with Ukraine news, the return of the Cold War between the two remaining nuclear powers, etc. None of this is necessarily good. But our emerging-market analysts at Federated are convinced the worst is already over. Russia has back a piece of its former empire that is largely Russian ethnically and linguistically (Crimea), and for all the squawking about it, both the West and even Ukraine has accepted this reality. Pushing for more than this appears a tall order. What if Putin stops here, as is now likely? It means we’ve survived yet another “Lehman moment,” adding even more power to the emerging consensus that long-term investing can resume because the world is truly a safer place than it was in 2008.
  • China stumbles forward. Over the last month, we’ve been treated to more signs of a slowing China as well as at least two more well-publicized corporate bankruptcies. On the other hand, leading Chinese indicators such as imports are up and its currency has weakened, presumably bolstering the export sector. We continue to see China as slowing but not blowing up, and we think the investment consensus is converging in this direction. More good news. People may be getting tired of waiting for China to blow up.
  • Pent-up demand bursts forth. For most of the last four months, half the country has been locked indoors. Those who weren’t had Ukraine and China to worry about. Despite all this, underlying indicators in housing, industry and employment all point toward continued underlying strength. Our view is that when anything approaching warm weather bursts forth, we are likely to see a spending party by consumers and corporations that could rival previous bursts we saw after some of the fear-induced pullbacks we saw after the serial European and Washington debt crises in 2012 and 2013.
  • Investors are leaning bearish near term. While most investors have bought into the idea that stocks are now the preferred asset class, I have been struck of late by the prevailing near-term bearishness. Some of this just revolves around last year’s big move, which means nothing statistically but causes nearly everyone to expect a major retracement. At a roundtable meeting with several senior-level buy-side colleagues over dinner at the 21 Club last week, I was struck by the fact that 100% of them, based on a secret ballot we took before the meal, expected the next big move to be down. Given that nearly all of them already have concluded they own insufficient equities for the long term and need to buy the correction, the odds are high that they don't get one, and then panic. Said differently, the move that would create the most pain, which is usually the move the market takes, is up.
  • The Fed and other central banks remain supportive. OK, so there was some indication in new Fed Chair Janet’s Yellen post-meeting narrative and projections accompanying the policymakers’ statement that the target funds rate may—may—begin to move a little earlier than expected, perhaps spring of 2015 instead of late fall next year. To us, the bigger message was that whenever the Fed acts, it’s going to do so in a very measured pace—as my fixed-income colleague Don Ellenberger at Federated put it, the benchmark funds rate will remain on a shallow glide path for a long time. Besides, the rationale for beginning to even think about tightening should be a positive message for stocks, as policymakers will only begin to weigh such a move because they believe the labor market and the broader economy are healthy enough to accept it. That’s a good thing.

In sum, we continue to see the market moving significantly higher this year, toward our longstanding 2,100 target on the S&P 500. When the spring thaw inevitably comes, watch for the possibility that we get a melt-up toward that level sooner rather than later.

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.
S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.
Federated Global Investment Management Corp.
Copyright © 2015 Federated Investors, Inc.

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