As the stock market continues to soar, it is attracting more money into stocks. That’s what usually happens during meltups. Joe and I think the market may be in the early stages of a meltup.
We will call it a “meltup” if our 2018 year-end target of 3100 for the S&P 500 is reached within the next 3-6 months rather than the next 12-18 months. To some observers, reaching 3100 by the end of next year may appear to be a meltup since it would mean that the S&P 500 would have risen 51.7% over the three years 2016-2018—i.e., 16.9% from Friday’s close through the end of next year, following the 18.4% gain ytd and 9.5% during 2016 (Fig. 1 and Fig. 2).
Maybe so, but let’s see whether earnings continue to rise rapidly, providing fundamental support for the stock gains so far and in the year ahead. A cut in the corporate tax rate, effective next year, along with continued deregulation should bolster profits. So should a continuation of the global synchronized boom.
Meanwhile, the flow-of-funds case for a meltup is mounting as more hot money pours into equity ETFs. Let’s follow the money:
(1) All equity funds: Mutual & ETFs. Over the past 12 months through October, equity ETFs attracted a record $375.6 billion of net new money (Fig. 3). Admittedly, some of that money might have come out of equity mutual funds, which had net outflows of $51.7 billion over this same period. Collectively, equity mutual funds and ETFs had net inflows of $323.9 billion, the best such pace since September 2014.
(2) All equity funds: Domestic & global. Over the past 12 months through October, the bulk of the inflows into all US-based equity funds went to those that invest globally. They attracted $240.6 billion, while all equity funds that invest domestically attracted $83.3 billion (Fig. 4).
(3) Equity mutual funds: Domestic & global. Interestingly, while $143.9 billion poured out of domestic equity mutual funds, $92.3 billion poured into US-based global mutual funds (Fig. 5).
(4) Equity ETFs: Domestic & global. The hottest hot money flows have been into both domestic ($227.2 billion) and global ($148.4 billion) equity ETFs (Fig. 6). The former was near recent record highs, while the latter made a new record high.
(5) All bond funds: Mutual and ETFs. Remarkably, net inflows into bond funds outpaced inflows into equity funds over the past 12 months. The bond funds attracted $415.8 billion, with $298.0 billion going into bond mutual funds and $117.8 billion going into bond ETFs (Fig. 7). The total inflows into all bond funds was the best since March 2013.
(6) All together. All told, all funds attracted $739.7 billion over the past 12 months through October. That was the best pace on record, going back to mid-2003.
(7) Bottom line. Given these massive inflows, it’s no wonder that bond yields remain remarkably low, despite the strengthening of economic activity, and that stock prices are continuing to rise in record-high territory.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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