Ongoing Market “Melt-Up” Could Lead To “Brutal” Pullback

Valuations may be stretched to the point that dangerously rapid “melt-ups” to new ATHs could prove destabilizing…

from Zero Hedge

As investors grow increasingly anxious about the prospects of a President Sanders or President Warren, more bold-faced finance names are jumping on the bandwagon during guest appearances on CNBC, BBG and Fox Business.

Few have taken the other side, which is why it’s occasionally refreshing to hear a big-name Wall Street guy repudiate the significance of politics on the market (though Joe Biden’s latest shocking display of incompetence occurred in Iowa this weekend doesn’t exactly inspire confidence).

Ed Yardeni

During an interview with CNBC published last night, veteran Wall Street strategist and Yardeni Research founder Ed Yardeni sounded uncharacteristically cautious. Instead of sharing unbridled confidence, he warned that valuations may have finally become stretched to the point that dangerously rapid “melt-ups” to new ATHs could prove destabilizing as the market reacts. Just six weeks ago, Yardeni sounded more carefree, appearing on CNBC to discuss his 2020 year-end S&P 500 target of 3,500 (about 14% higher from where the market closed on Monday).

According to Yardeni, if the S&P 500 forward earnings multiple hits 19 or 20 (compared with roughly 17 right now, which is above the long-term norm of 15-16), investors could risk sparking a “nasty correction” (though Yardeni focuses on forward earnings in his interview, his propriety Yardeni fundamental indicator is also beginning to reflect stretched sentiment.

Like most perma-bulls who doubled down after last year’s brutal Q4 selloff, Yardeni has been riding high this year. But he’s fearful that the market’s performance might be too much of a good thing.

“I just don’t want too much of a good thing here. I’d like this bull market to continue at a leisurely pace not in a melt-up fashion…that’s actually the risk.”

However, by making this call, Yardeni risks joining a long time of analysts who have warned about the consequences of a rapid meltup, only for stocks to power relentlessly higher. This year, stocks have moved in an almost uninterrupted diagonal line to the upper right, though trade-deal and occasional Fed-related anxieties have provoked brief pullbacks and periods of instability.

At the very least, Yardeni managed to time his call with US stocks hitting new all time highs, buoyed by the cycle of trade deal anxieties leading to Fed-induced relief. However, with two members of the FOMC voting against the last rate cut at the Fed’s meeting last week, and Jerome Powell hinting in the statement and Q&A that the central bank’s mid-cycle adjustment might be over, cagey investors are beginning to suspect that next time, investors might not be able to look to the Fed for support (unless Trump pulls a Suge Knight and dangles Powell over a balcony in the Eccles Building until he agrees to deliver the 100 bp cut that the president has demanded).

To that end, Yardeni said he might soon be “taking some profits” though he insisted that he “wouldn’t be out for long.” Don’t get the wrong idea: Yardeni remains firmly in the “bullish” camp, believing that any snapback in equity valuations is bound to be short-lived.

“If the market gets ahead of itself and gets to 3,500 a lot sooner…I may have to consider taking some profits,” Yardeni said.


“I’d much rather stay fully invested in this bull market and not be forced to jump out just because it is ridiculously overvalued.”

But before we get carried away, it’s important to note that Yardeni insists he wouldn’t be out for long. He believes the market still has a lot more room to run before the cycle turns.

“I’m sticking with this bull market. I think it’s going to continue to see higher levels,” said Yardeni, adding this forecast isn’t contingent on who wins next November’s 2020 presidential election.

As for his views on the presidential race…Yardeni believes Trump will win a second term, but even if a Democrat does prevail, that wouldn’t necessarily mean the end of the bull market, he says.

Even though he says President Donald Trump will most likely win a second term, Yardeni doesn’t see irrevocable damage to the markets or economy if a democrat wins.

“I’m not convinced that if [President] Trump loses and a Democrat wins that it necessarily implies a bear market and a recession,” Yardeni said. “But I think initially the market would not react well to a change.”

On an unrelated note: Yardenis’ PR team must be at least a little miffed that his latest appearance on CNBC was somewhat overshadowed by another regular: Leon Cooperman, whose dramatic, teary-eyed performance about the worsening political divide in the US and the depredations of the burgeoning socialist movement was one of the more memorable segments of the past few weeks.