Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide. Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.
The opinions expressed below are my own
Party party party. This is what US equity investors look like.
If US equities are reacting to the money supply punch bowl, this party is going to last much longer.
The Fed may be taking the punch bowl away, but it is a slow process. In the meantime, the ECB and the BOJ keep bringing out more punch.
Markets may finally be so globally connected that the Fed isn’t the only party host anymore. Hold this thought for a bit….
This rally in US stocks is remarkable. Earnings season and strong guidance are the media’s go-to reasons to explain the latest leg in the rally but I don’t buy it. Valuations are stretched, even if you re-boost earnings and revenue expectations. The fundamental case to buy stocks is weak. Equities march higher every day though and news headlines aren’t at work. The tape climbs and the climb is retroactively explained with nondescript justifications that aren’t new.
Q: “Why are we rallying?”
A: Earnings season
A: Tax reform
A: Strengthening economy
A: Weakening Dollar
Depending on who you ask at what time of day, you get one of these, or some combination.
These answers aren’t garbage but they aren’t new either. There’s nothing about today that materially changes these factors yet we get a fresh boost of bullishness every session.
This is momentum. That’s not a magical revelation obviously but it’s the longest and most unshakable stretch of bullish momentum I can remember. Is this momentum rooted in *sentiment* or is it rooted in something else.
Let’s get back to the punch bowl analogy. If this momentum is actually fueled by the major central banks of the world, then here’s the future:
- We’re going up until one or all of the central banks do something *massively* hawkish.
o That ain’t happening anytime soon
They have to surprise hike and/or target equities and/or talk about curtailing speculative excess. They may have to cause a recession.
So we may be in the endgame of the central bank cycle. Maybe the central banks have accommodated for too long and they have to overshoot in the opposite direction. When that happens, it’s going to be as ugly for equities as ugly gets.
Here’s the rub. The central banks haven’t even started to wonder out loud if the accommodation has been too great for too long.
If I’m right (big if), they are so far behind the curve that the equity upside between now and their moment of truth is still large.
Maybe stocks will rally another 20% or 50% or 100% until they take shock everyone.
For the first time since the crisis, I’m worried that the Fed and the other central banks, cannot exit ZIRP smoothly.
I’m worried that the policy error is already done.
I’m worried that we’re going to rally huge and then crash even bigger.
If I’m wrong, this rally is just an amazing sentimentally driven momentum event…. it will unwind at some point. It may get a little bit messy but it’ll be nothing compared to the policy mistake that I fear.
I sure hope I’m wrong.
See you tomorrow,