Why? The reason for low yields and high stocks was simple: trillions in central bank intervention. The result is an era of lower yields & higher stocks, or as the chart above shows, an era in which the alligator jaws of death are just waiting for their moment to shine. Here are the three phases:
- 1981-2009 (disinflation/Fed put), 10-year Treasury yields down from 15.8% to 3.9% = 10.7% annualized S&P 500 returns;
- 2009-2016 (Fed QE/global ZIRP) yields down from 3.9% to 2.4% = 14.9% SPX ann. return;
- 2017 YTD (ECB/BoJ QE) yield down to 2%, SPX annualizing 17.5%.
Here is Hartnett's math, and the explicit - and quite familiar- reason why both stocks and bonds continue to rise:
Liquidity Supernova: central bank liquidity up $2.0tn YTD to $15.6tn = the catalyst for $7.0tn YTD jump in global equity market cap + lower bond yields; Fed likely announces balance sheet reduction at FOMC 9/20 (Chart 1); downtrend in Fed liquidity + ECB taper remain necessary conditions for correction.
How long will Hartnett's trademarked "Icarus Rally" continue? A little over 100 more S&P points according to the BofA strategist:
As a reminder, it was Hartnett who two months ago, said that "The Most Dangerous Moment For Markets Will Come In 3 Or 4 Months." If he is right, that would make the moment 1-2 months away.Icarus targets: we see SPX 2630, CCMP 6666, ACWI 510; we are long stocks, commodities, volatility, short bonds; we recommend barbell of uber-growth (IBOTZ, DJECOM) & uber-value (GDX, BKX) precedes peak; we think US dollar & China/Japan banks good contrarian autumn plays on global GDP upgrades.
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Finally, here are BofA's observations on the latest weekly fund flows:
- biggest US equity inflows in 13 weeks ($1.9bn) which coincides with FMS showing largest US UW since 2007,
- more inflows to equity ETFs ($304bn YTD), outflows from mutual funds ($85bn YTD),
- Largest Japan inflows in 44 weeks ($3.5bn),
- largest inflows to US small caps in 6 weeks ($1.2bn) on tax reform optimism,
- largest inflows to US Treasury funds in 62 weeks ($2.2bn) despite tax reform optimism but in keeping with quest for yield (note Austria joining Ireland, Belgium, Argentina, Mexico in issuing a 100-year bond).
2017 Champions League returns: Table 3 shows top 3 annualized YTD total return winners are tech (47%), EM equity (45%), healthcare (30%); bottom 3 are US dollar (-13%), energy (-4%), TIPS (4%)… outperformance of "deflation" vs "inflation".