A variety of encouraging signs indicate that stock prices may have continued upward impetus through the end of 2017 and into 2018, CNBC reports. Among these are the progress of tax reform in the Senate, where the Republican-sponsored bill has advanced out of committee, and Senate confirmation hearings for Jerome Powell, nominated to succeed Janet Yellen as Federal Reserve Chair, who inspired investor confidence by indicating similar policy views to Yellen's, CNBC says. Also given the fact that the stock market rally is broad-based and global, Todd Sohn, a technical analyst with Strategas Research Partners, sees a "melt-up" scenario developing, per CNBC.
What "Melt-Up" Means
According to Investopedia's strict definition, a "melt-up" occurs when investors chase an asset class simply because it has been rising in price, thus sending prices yet higher. However, the current situation does offer some fundamental factors that justify continued bullishness about equities, such as corporate earnings that are still growing robustly, solid economic growth around the globe, and improving prospects for U.S. tax reform that would give profits a further boost.
In "melt-up" fashion, some bearish investors may become buyers simply because they are tired of seeing stock prices rocket ever upward, while they stay on the sidelines. These investors may be setting aside their lingering concerns about high valuations and expectations of a long-overdue correction, at least for the near term. (For more, see also: Global 4% GDP Growth Can Fuel Stocks in 2018: Goldman.)
How Broad Are Gains?
Skeptics and bears point to the outsized impact on the S&P 500 Index (SPX) by the five mega cap FAAMG technology stocks, which account for nearly 14% of that index's value. On the other hand, about 70% of S&P 500 stocks have posted gains this year, and most of the major indexes around the world either have set new records, or have regained significant ground lost years ago. These facts lead the bulls to conclude that this rally is being propelled by much more than outsized gains in a handful of outsized stocks. (For more, see also: Stocks Could Rise As Much As 27% in 2018.)
On Tuesday, the S&P 500 Financials Index posted a gain of 2.6%, its best day since March, on the strength of comments by Powell that the Fed is likely to raise short-term interest rates in December, which would boost financial companies' earnings, The Wall Street Journal reports. The improved outlook for the passage of corporate tax cuts was another factor sending financial shares upward, as well as the shares of retailers and small businesses, the Journal adds, given that all these companies tend to have relatively high effective federal income tax rates. The S&P 500 Consumer Discretionary Index rose 1.1% on Tuesday, per S&P Dow Jones Indices, while the small cap Russell 2000 Index gained 1.5%, per the Journal.
Heading into the holiday shopping season, the Conference Board Consumer Confidence Index is at its highest level in 17 years, per the Journal, which adds that world economy is looking its strongest since 2010, based on a report from the OECD. Given that personal consumption expenditures (PCE) currently equal about 69% of U.S. GDP, per the Federal Reserve Bank of St. Louis, the willingness of consumers to open their wallets should drive continued growth in the economy, and in stock prices.
In fact, according to another Journal article, the Conference Board's index of consumer confidence already was at a 17-year high in October, and November's results were even better. Unemployment dropped to a 17-year low in October, and increases in consumer optimism are being registered across income levels, the Journal says. Meanwhile, online shoppers are spending with gusto in the early days of the holiday shopping season. (For more, see also: Amazon's Holiday Dominance Is a Bonus for Investors.)