Key Points

  • Stocks continue to buck every variety of negative news.

  • Melt ups don’t tend to end well, but so far the fundamentals remain supportive.

  • Underneath the surface have been increasing rotations—a healthy occurrence, for now.

Over the course of the past year, we have often listed a melt up as one of the “risks” the market faces. It’s been categorized as a “risk” based on the history of melt ups—as good as they feel while they’re occurring, they have typically not ended well. Melt ups tend not to peter out, but to instead end with a bang; and timing the crescendo is extremely difficult.

Teflon market

Stocks have persistently defied the skeptics, who have pointed to political dysfunction, monetary policy uncertainty, and potential geopolitical crises as reasons for woe. President Trump, on the other hand, has consistently touted the stock market and taken credit for its steady ascent over the past year. We believe it’s been the actual fundamentals—which are global in nature—that have driven the extraordinarily calm surge in stocks. Paramount among those fundamentals is the fact that all 45 OECD countries are growing; with about two-thirds experiencing accelerating rates of growth. Couple that with the start, in mid-2016, of a sharp turn-for-the-better in U.S. corporate earnings growth (aided by the aforementioned strong global growth), and you have the recipe for yet another leg up in the ongoing secular bull market which began nearly nine years ago.

In fact, the following major countries’ stock markets have outperformed the S&P 500 so far this year: China, France, Germany, Hong Kong, India, Italy, Japan, and Spain. This has resulted in outperformance by both the MSCI EAFE (developed international) and MSCI EM (emerging markets) indexes so far this year. I’m not sure President Trump can take credit for that.

Shades of 1995

The lack of drama in the U.S. market—at least on the surface—has been remarkable. I’ve recently been asked several times by clients and other investors whether there have been years in history that highly resemble 2017 to-date. Bespoke Investment Group (BIG) has been tracking the correlation between this year and past years, and the latest data puts 1995 at the top of the ranking. For what it’s worth, seven of these top-10 correlated years occurred within secular bull markets (1995, 1954, 1958, 2013, 1964, 1997 and 1955). In addition, notice that most of the highly correlated years had significantly higher year-to-date performance than what we’ve seen this year.

Source: Bespoke Investment Group, as of December 1, 2017.