One week ago, in his weekly "flow report", BofA's Michael Hartnett looked at the "Disconnect Myth" between rising stocks and sliding yields and succinctly said that there is "no disconnect between stocks & bonds."
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%.
Fast forward to today, when in the interim period stocks have continued to rise, hitting new all time highs in both the US and globally, oblivious of any news and fundamental developments - as one would expect from a massive asset price bubble, and in line with what Hartnett has dubbed a Liquidity Supernova.
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:
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.
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.
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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 flows: YTD flow winners are EM debt (17% of AUM), financials (14%), tech (13%); bottom 3 are real estate (2%), health care (1%) & US stocks (0.1%).
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".