The boss of the world’s biggest money manager is warning most investors are missing out as stocks march higher, just as under-invested hedge funds are showing signs of breaking ranks. That has triggered a debate on how the rest of the year will play out, given that strategists year-end index targets have already been reached.
“If we are right that the global economy is not about to enter an economic abyss, we would have to admit that the risk of a ‘melt-up’ in U.S. and global share prices would rise,” said Sean Darby, Hong Kong-based global equity strategist at Jefferies.
Investors are having to decide if the dovish policy pivot from the world’s central banks can shore up global growth enough to overlook corporate earnings that are expected to contract this reporting season. For now, the stock market is saying yes, with the MSCI AC World Index on track for a fourth month of gains in April.
Economist Dario Perkins is reminded of 1998, when central banks stepped in to shore up economic growth, only to help add fuel to the final stages of a stock-market boom that came to an abrupt end.
“Central bank stimulus helped prevent recession in 1998, triggering a two year ‘melt-up’ in risk assets,” said Perkins, managing director of global macro at TS Lombard in London. “But disappointing earnings meant the resulting stock-market bubble was unsustainable. Corporate profits could again play a decisive role in determining how long the current cycle lasts.”
Melt-Up
With the S&P 500 Index sitting just over a percent away from its all-time high, BlackRock Inc. Chief Executive Officer Larry Fink fueled the discussion this week, noting many underinvested market players aren’t rushing into stocks.
“We have a risk of a melt-up, not a melt-down,” he told CNBC.
While many hedge funds have indeed sat out the rally, data show that stance is changing. This week’s Bank of America survey of global money managers showed funds ramped up gross assets relative to capital to the highest level in six months. Separately, Credit Suisse Group AG said hedge funds’ net exposure to the U.S. relative to global stocks is rebounding from a multi-year low, suggesting a “catch-up trade” may be growing.
Of course not all signs are pointing to a move higher. With the S&P 500 up 16 percent year-to-date, some technical indicators indicate the rally could be running out of steam.