‘It’s a melt-up’: U.S. stocks are on an unusually strong run heading
The U.S. stock market has been on a tear as it heads toward the holiday season.
“It’s a melt-up,” said Zhiwei Ren, managing director and portfolio manager at Penn Mutual Asset Management, in a phone interview. “It’s a very bizarre rally,” he said, expressing concern over the speed of the rebound from September’s pullback.
All three major U.S. stock benchmarks rose to fresh peaks Friday, marking a fifth straight week of gains for the S&P 500
SPX,
Dow Jones Industrial Average
DJIA,
and the Nasdaq Composite
COMP,
Earlier in the week the benchmarks each notched a fourth consecutive day of all-time closing highs to mark their longest winning streak together since October 2017, according to Dow Jones Market Data. And the S&P 500 has seen just two down days in the last 18 trading sessions.
The Federal Reserve is hardly standing in the way of an ever more richly valued stock market, maintaining a loose monetary policy even with its Nov. 3 announcement that it will start winding down its quantitative easing program this year. Fed Chair Jerome Powell said the central bank can be ‘patient, but won’t hesitate’ to raise interest rates should already elevated inflation accelerate.
But some investors have worried the Fed may be behind the curve.
“The economy continues to cook, and stocks are loving the very easy monetary policy,” Paul Nolte, portfolio manager at Kingsview Investment Management, wrote in a Nov. 1 note. “The added kick from a government infrastructure bill will only add dry tinder to an already hot fire.”
The Fed doesn’t want to upset the financial markets, something that decades ago was implied but now is “explicit,” Nolte told MarketWatch by phone Friday. The central bank continues to “put money into the system” at a time of “very high” valuations in equities.
The stock market has gotten too far ahead of corporate earnings, in Nolte’s view. While “valuations are a lousy timing tool,” eventually tighter monetary policy could become a catalyst for lower stock prices, said Nolte, who believes the Fed should start raising rates at this point.
“You’ve never had economic policy this easy during an economic boom,” he said.
The Fed has kept its benchmark interest rate near zero in the economic recovery from the pandemic.
Before the pandemic, the central bank tried quantitative tightening in the fourth quarter of 2018 and announced an interest rate hike in December of that year — but the moves didn’t play out well in the stock market, recalls Nolte. It wasn’t until after Christmas that Chair Powell “reversed himself a bit,” helping to fuel a rally after stocks had dropped.
The S&P 500 tumbled about 14% during the fourth quarter of 2018, bringing the index down 6% for the year, according to FactSet data. The index then roared back 29% in 2019, climbed 16% in 2020 and has soared 25%…
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