Benchmarks & The 2018 Melt-Up Parallel

“The bullishness is rampant,” David Rosenberg, who’s always good for a quote or two or three (or however many you want to extract from him) told Bloomberg, for Friday’s edition of “Katherine Greifeld, Lu Wang, Sarah Ponczek, and/or Vildana Hajric do cross-asset strategy.”

There are several jokes in there.

Rosenberg’s always got the medicine if you need to pair a recognizable name with a cautionary quotable.

And every Saturday, Bloomberg readers wake up to a handful of prominently-displayed articles written by some combination of those four columnists. It’s like an early 2000s mixtape — every track is by the same four or five rappers, with the only question being who gets to claim the song, and who’s relegated to being listed as a “feature.”

The humor is light-hearted. Hopefully I don’t get any irritated direct messages.

Anyway, Rosenberg’s right. The bullishness is “rampant.” All four major US benchmarks hit record highs on the same day Friday. The last time that happened was in early 2018, during the post-tax cut melt-up.

If you’re old enough to remember early 2018 (and some members of the Robinhood set may not be), you’ll recall that January’s melt-up dead-ended in a February meltdown, when the VIX ETP complex imploded, summarily wiping out the retail short vol trade.

You might find solace in the fact that, at least on the simplest of measures, conditions aren’t nearly as overbought now as they were then (figure above).

For BofA’s Michael Hartnett, folks chasing things up here may be pressing their luck. A record $115 billion when into stocks over the past four weeks, he remarked in a Thursday note, adding that the bank’s “Bull & Bear Indicator” is “accelerating toward ‘extreme bullish,’ surg[ing] from 4.7 to 5.8” in just a week.

Technically, 5.8 is still “neutral,” and you’ll note from the history of the indicator (far-right chart above) that it ticked “extreme bullish” in January 2018, just prior to the event affectionately known to market participants as “Volpocalypse.”

In the same Thursday piece, Hartnett noted that over the past 10 months, investors have witnessed the “quickest bear market of all-time,” “the greatest Wall Street rally of all-time,” and are now “rush[ing] to discount the greatest Main Street recovery of all-time.”

On that latter point, BofA projects 5.4% growth for the global economy in 2021 and 4.5% growth for the US. The table (below) summarizes their forecasts across macro variables and various assets.

For weeks, Hartnett has suggested that investors should be wary of “peak policy.” 2020 has seen some $22 trillion of stimulus globally, with $8 trillion coming from QE and $14 trillion from fiscal initiatives. And that’s to say nothing of 190 rate cuts (on BofA’s count).

Next year, those figures are projected to be dramatically lower, but while the “policy tailwind for Wall Street [will] fade,” Hartnett says there won’t likely be a bear market “without Fed tightening in 2021.”

For what it’s worth, clients don’t necessarily agree with the notion that it’s time to fade the rally — not with everything (almost literally) hitting highs.

Specifically, Hartnett says the “client zeitgeist is ‘you’re either 6-8% too early, or 6-8 weeks too early, or both.” Still, he’s sticking with a call to “sell into strength” on the vaccine news, “peak price, positioning, policy, [and] profits.”

Coming full circle, Hartnett draws a connection with 2018, calling the tax cut melt-up an “analog.”

Of course, if you’re looking for a plausible excuse to fade record highs on all four US benchmarks in the same day (Friday), you could simply point to Wednesday, when the US hit record highs on three other “benchmarks” simultaneously: COVID-19 cases, deaths, and hospitalizations.