Analysts at Bank of America Merrill Lynch made headlines by talking about a stock “melt-up” in 2020. It’s a clever term and bodes well for stockholders around the world, not just in the United States.
Coincidentally, it also bodes well for the bottom line of Bank of America Merrill Lynch.
Liquidity and Certainty Drive Markets
There are some good reasons why analysts see stocks moving higher. For one, they expect the Federal Reserve to keep interest rates low and to continue pursuing some form of quantitative easing. That means adding more liquidity into the economy, which drives equity prices.
Then there’s the apparent resolution of two other major economic uncertainties. The first is the result of the recent British elections. Pro-Brexit Conservative Prime Minister Boris Johnson won a huge victory over Labour Party adversary Jeremy Corbyn last week. The Conservatives also won a new and historic majority in Parliament.
These wins make Brexit all but a done deal. It’s going to happen. By the end of January 2020, Britain will be out of the European Union.
How much of a disruption to local and even global trade that will cause, remains to be seen. Nonetheless, the UK’s direction is now clearer and more certain. On the flip side, President Donald Trump has promised a “yuge” trade deal with the post-Brexit UK. If that happens, all else being equal, we can expect further gains in the stock prices.
The second uncertainty is the U.S.–China trade war. With a phase one deal apparently agreed to by both countries and phase two in negotiation, market analysts are feeling much better about the prospects for the near future, even if the agreement is only a temporary fix on a very long-term problem.
That’s understandable. To the market’s way of thinking, the global economic slugfest between the United States and China is nothing but trouble. Any improvement, even in the short run, is an improvement in trade stability and will produce a welcome boost to the market. Makes perfect sense.
But as favorable as these positive developments are—and many analysts believe that they’ll have a bullish influence on equity prices—some expect the melt-up to become the final phase of an equity bubble, closely followed by a market adjustment.
That might be the case. But maybe not. Significant events are happening in other parts of the world that may push a market adjustment a bit further down the road.
US to Benefit From Global Flight to Safety?
For example, once Brexit occurs, the uncertainty level will rise in the EU and economic levels may well fall. In fact, a recession in Germany is already baked into the Brexit cake, which means less trade with China and other nations.
Political unity may also suffer. Many observers, for example, expect less stability in post-Brexit Europe. Italy, for instance, may decide that remaining in the EU is not to their advantage, as the EU’s policy of accepting mass immigration is not popular with Italians. U.S.–EU trade may lessen as well, but may have the opposite effect on the stock market, as capital flows out of a troubled eurozone and into an energized U.S. economy.
In the eastern Mediterranean Sea, Turkey’s economy is flatlining, driving their interference with Cypriot oil drilling. That’s adding to the already high tensions in that region. Indeed, Turkey has threatened Europe with allowing millions of Syrian refugees passage to Greece and the rest of Europe if the EU doesn’t support Turkey’s Syrian policy. Indeed, a probable U.S. withdrawal from Syria may well invite destabilizing power struggles in an already explosive neighborhood.
And in China, even with the phase one agreement, China’s economic fortunes won’t likely turn around soon. The agreement is more political theater for both leaders than it is a solution. The Hong Kong crisis, the global Huawei scandal, food shortages on the mainland, fleeing businesses, a massive debt crisis on the horizon, higher taxes, and rising unemployment in the middle class are all making China much less attractive to the world.
In other words, bad news in other places in the world can mean good news for the United States, especially in high liquidity assets, such as stocks.
We may soon see a bigger melt-up than anyone expects. Time will tell.
James Gorrie is a writer and speaker based in Southern California. He is the author of “The China Crisis.”
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.