The Market Melt-Up Before the Top

The following is a summary of our recent Big Picture podcast, “The Meltup Before the Meltdown,” which can be accessed on our site here or on iTunes here.

We’re likely near the end of this business cycle, says Financial Sense's Jim Puplava, and normally when we come to the end, all seems well: the economy is booming, stocks are hitting records, and people are making money.

For example, think back to the stock market in 1999 and the first 3 months of 2000. The Nasdaq went vertical in a classic, melt-up euphoria as everyone piled into the sector driving the "New Economy".

As we move closer to the top of this market, we’re more likely to see euphoria, he added. Right now, mutual funds and stocks are going up by double digits. Unemployment is low, consumer confidence is high, retail sales are up, and the economy is booming. All of these indicators normally occur around the end of the cycle, and we know what eventually triggers that end: a Fed rate raising cycle, which we are now in.

Good Times May Trigger the Shift

We’re seeing PMIs appear to be very strong, especially the ISM Manufacturing and Non Manufacturing Indexes, Puplava noted. In September, the ISM Manufacturing hit its highest level in 13 years.

“Despite the weather we had with those hurricanes toward the end of August and September, we could see a GDP print eventually at 3 percent for Q3,” he said. “The economic numbers have been picking up.”

The economy is growing, finally above the 2 percent GDP range we’ve been stuck in for years. Another big consideration is that times aren’t just good in the US, but internationally, economies and markets are picking up as well.

Global growth is in sync for the first time since after the recovery. In fact, the IMF recently raised its forecast for this year to 3.6% and 3.7% for next year. To put this in perspective, this is a major improvement from the last 8 years, and even last year, where global growth was 3.2%.

“What we’re seeing is a broad-based acceleration in economic growth here and abroad,” Puplava noted. “Outside some kind of black-swan event, 2018 could end up being the strongest year for growth since 2011.”

Dangers and an Exit Strategy

With things heating up, Puplava is concerned that the Republican tax plan is coming at a bad time — potentially helping to stoke the euphoria necessary for the end scenario to play out.

“This (tax cut) is coming at the wrong time,” he said. “If they do pass a tax cut, this could extend the business cycle a while longer, but it could also spike inflation and encourage the Fed to be more aggressive with rate hikes … We could have monetary policy counteracting and fighting fiscal policy, and that ends in a train wreck.”

Also, because of flaws in the legislation, such as the removal of certain exemptions, Puplava stated this plan will only be setting the stage for higher taxes down the road.

Right now, Puplava is de-risking clients’ portfolios and formulating an exit strategy.

“There has been nothing that has been normal about this economic recovery, and I don’t think there’s going to be anything that’s normal on how this all ends,” he said. For now, “Enjoy the melt-up, because this too will come to an end.”

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