Several prominent investors and advisors predict that more big stock gains are ahead, including BlackRock Inc. CEO Larry Fink, who says the market is on the brink of a major 'melt-up.' Fink, who leads the world's largest advisory firm overseeing about $6 trillion in assets, says stocks may benefit from a sharp momentum shift as lower-than-expected interest rates push investors back into higher-yielding equities.
“We have a risk of a melt-up, not a meltdown here. Despite where the markets are in equities, we have not seen money being put to work,” Fink, told CNBC in a detailed interview. Fink's analysis is summarized in the table below and in this story.
Why Stocks Will Melt Up: BlackRock’s Fink
- Fed more dovish than ever
- Shortage of good assets
- Investors holding record amounts of cash
- Huge underinvestment in stocks as investors rushed to fixed-income
- Investors anticipated rising interest rates which is not happening
- These forces could ignite a melt-up
Source: Larry Fink, CNBC.
What it Means for Investors
Despite the S&P 500 index's robust 16% gain this year, Fink says there has been an overall underinvestment in equities as investors flocked to fixed-income on expectations of higher interest rates. But the Federal Reserve’s new dovishness means interest rates are likely to remain lower for longer, creating a shortage of higher-yielding assets.
Fink expects investors to soon wake up to the new reality of lower rates and start pouring the record amount of cash they are currently sitting on back into equities.
Phil Orlando, chief equity market strategist at Federated Investors Inc., shares Fink’s view. He expects stocks to rise by as much as 50% from the bottom reached at the end of last year, which would mean more than 20% from their current levels in the S&P 500.
Unlike some investors, Orlando is not worried about valuations, arguing that low inflation and low bond yields will allow multiples to continue expanding. Even if first quarter earnings miss expectations and the market suffers a slight pullback, it would be “a buyable pullback,” he told Bloomberg.
Historical data pulled by Ned Davis Research also suggests potential bullishness for equities throughout the year. The research firm indicated that the S&P 500’s rise in each of the first three months of the year has only happened 22 times before. Whenever such a pattern has occurred, the broad market index averaged a gain of 7.23% over the following nine months. The specific performance, of course, varied widely during each of the 22 instances.
As momentum shifts back into equities, some investors argue that the tech sector could be one of the biggest beneficiaries. The Technology Select Sector SPDR Fund (XLK) is up nearly 25% thus far this year, and Miller Tabak’s Matt Maley says Netflix Inc. (NFLX) and Facebook Inc. (FB) are positioned for major breakouts while Strategic Wealth Partners’ Mark Tepper picks Amazon.com Inc. (AMZN) as the big winner. Of course, there's a downside to all of this optimism. Investors should be reminded that melt-ups—late-stage bull market signals that tend to be driven by momentum rather than fundamentals—often end in meltdowns.