“There’s too much global pessimism. People are still very underinvested. There’s still a lot of money on the sidelines… We have a risk of a melt-up, not a meltdown here.”
– Larry Fink, BlackRock CEO
Well, that was quick.
After recording its worst December since 1931, the S&P 500 is trading back above record highs.
Frankly, I’m not surprised.
On New Year’s Eve 2018, I wrote how the U.S. stock market could rally 20% in 2019.
Well, it hasn’t jumped that much quite yet…
But it’s getting close. The SPDR S&P 500 (NYSE: SPY) has risen by 17.4% this year to its highest level in seven months.
The U.S. Economy Roars Ahead
At the start of the year, global economic growth appeared to be grinding to a halt.
With the U.S. and China accounting for more than half of global economic growth, the health of these two economies was key to the health of the global economy.
Estimates for U.S. GDP growth were uniformly grim.
As recently as March 22, the venerable Goldman Sachs forecast a mere 0.7% economic growth for the U.S. economy in the first quarter of 2019. And that was up from a previous 0.4% forecast.
Wall Street’s premier investment bank could not have been more wrong.
U.S. GDP growth for the first quarter came in at 3.2% – crushing all previous estimates. (And that’s after the government shutdown shaved 0.3% off this figure.)
The Trump tax cuts turned out to be more than just a sugar high.
Throw in a supportive Fed and there are suddenly plenty of reasons to believe the U.S.-led stock market rally is set to endure.
And China Steps on the Gas
Last year, the trade war with the U.S. had put both the Chinese economy and the Chinese stock market into a funk.
So China’s bureaucrats once again had to reach into their bag of tricks to boost the world’s second-largest economy. They told banks to start lending more to smaller businesses. They cut personal income and corporate taxes. They also accelerated infrastructure spending.
Worried about reining in debt, Chinese officials had held off on approving new projects for 2019. But that all changed after China’s economic slowdown. China’s revised goal for 2019 was to build 3,200 kilometers of high-speed rail lines across the nation. That amount equals what Spain has in total today.
These efforts have paid off.
The Chinese economy grew by 6.4% year over year in the first quarter of 2019. Factory output soared by 8.5% in March, and retail sales exploded by 8.7%.
The bureaucrats had worked their magic once again.
What About the U.S. Stock Market?
Here’s the critical question for investors…
What does the good news about the global economy mean for the U.S. stock market?
A stronger economy has translated into improved earnings for U.S. corporations. So far, almost 80% of companies in the S&P 500 Index have beaten expectations.
Still, the historical connection between the economy and stock market performance is weaker than you think. And stock markets discount the future. (All the current good news may already be in the price.)
And then there is the issue of market seasonality.
History tells us that almost all the gains in the U.S. stock market occur between November and April. Significant gains between May and October are often hard to come by.
Remember the old Wall Street expression “Sell in May and go away.”
The bottom line?
After a gut-wrenching end to 2018, the U.S. stock market has just come off one of the strongest four-month periods in recent financial memory.
While BlackRock CEO Larry Fink warns of a melt-up, I don’t expect that to happen in the next four months.
Financial markets tend to peak on euphoria. We are still far from that extreme sentiment today.
If a euphoric melt-up does occur, I’d peg it near the fourth quarter – traditionally the strongest quarter of the year.
So with the market entering a seasonally weak period starting in May, I’ve lightened up on the risk in my personal portfolio ahead of the summer.
History suggests that you may want to do the same.