He’s No Janet Yellen, But For Now, ‘Straight-Up Bliss’

“Straight-up bliss”.

That’s how Bloomberg describes the state of the US equity market which on Friday capped off another week of gains. It was the the 11th green week in 12.

This is reminiscent of how 2019 began. Thanks to Jerome Powell’s “I figured it out” moment on January 4 (the day he spoke at an event in Atlanta, flanked by Janet Yellen and Ben Bernanke just in case), the S&P began what may end up being the best year since 1997 rising in nine of 10 weeks.

The Nasdaq, which crossed 9,000 on Thursday, slipped a bit on the final day of the week. Had it managed to close higher, it would have been the 12th consecutive day of gains for the tech gauge, which is up nearly 13% for the quarter.

This is the best Q4 for the Nasdaq in 15 years, and it comes on the heels of one of the worst Q4s on record.

It’s hard to believe, but it was just 12 months ago when market participants were pondering a bear market in the FANG contingent, and celebrating Morgan Stanley’s Mike Wilson as a regular Nostradamus.

Fast forward 12 months and, well, let’s just say things are going ok for the likes of Apple and Amazon again. In fact, Apple is up a silly 83% in 2019, and damn near 30% this quarter alone. Maybe you’ve noticed.

Is it all stretched? Well, sure. Maybe. But then again, Bloomberg casually reminds you that “people who heeded warnings about euphoria after the Nasdaq surged 16.5% in the first quarter missed a 16.7% jump since it ended”.

Adding insult to injury for anyone gullible enough to have actually traded on the “news” coming out of the tabloids, the same weekly market wrap dryly notes that “gains don’t always beget losses — just ask everyone who has watched the Faang stocks triple after they sold them in 2013”.

But – and there’s always a “but” – we would sound one note of caution amid the melt-up, and it relates to the fact that things have never quite been the same since Janet Yellen (reluctantly) handed the reins to Jerome Powell.

“It’s becoming blatantly obvious that peak central bank power has passed”, BofA cautioned, in one of multiple year-ahead equity pieces released over the past six or so weeks.

“The pinnacle occurred under Yellen’s tenure, when repeated efforts to protect markets at very low levels of stress resulted in a market that competed for ‘dip alpha’ to the point that the S&P went for the longest period in history (since 1928) without a 5% dip (405 trading days ending in Feb-18)”, the bank added.

Although central banks have obviously succeeded in engineering another voracious rally across virtually all financial assets, it’s worth noting that even as the VIX didn’t sustain any spikes above 25 in 2019 (let alone the two moves to 35 and beyond in 2018), the average is broadly similar, and the lows higher.

That visual throws things into stark relief in terms of the extent to which 2019, for all its glory, was no 2017 in certain respects, despite the best efforts of the benefactors with the printing presses.

On an individual stock basis, Goldman writes that options are pricing a +/-20% move for the average S&P 500 stock over the next 12 months.

(Goldman)

That’s “below the December 2018 level, but remains high relative to the prior five years”, the bank remarks.