The Market “Meltup” Could Soon Cause a “Meltdown”

Stocks are see-sawing this morning as August comes to a historic close. The S&P, Dow, and Nasdaq Composite have all regained their 2020 losses.

Now, the question is whether they can continue their run.

“[We] had hoped that the market would consolidate its gains since March 23, giving earnings a chance to rebound,” Ed Yardeni, president and chief investment strategist at Yardeni Research, said in a note.

“However, Fed officials continue to drive up stock prices by committing to keeping interest rates close to zero for a very long time […] Consequently, they are fueling the meltup in stock prices.”

A pair of stock splits from market leaders Apple (NASDAQ: AAPL) and Tesla (NASDAQ: TSLA) could prevent stocks from “melting down” over the next week. AAPL’s 4-for-1 split and TSLA’s 5-for-1 split spurred on significant gains for both stocks as of noon.

And, in many ways, it’s been an Apple and Tesla-driven market. As long as those two stocks keep climbing, so too could the major indexes.

But in terms of the bigger picture, investors might need more bullish evidence to continue buying.

Especially when it comes to the U.S. economic recovery.

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“July activity indicators have generally printed favorably […] we are lifting our tracking of current-quarter growth from 20.0% to 27.5%,” wrote J.P. Morgan Chief U.S. economist Michael Feroli.

“Even with some slowing in August-September household outlays, perhaps due to the interruption of federal income support, real consumer spending looks set to grow at 36.0% annual rate in Q3.”

And though that’s nice to see, it might not be enough to ensure a speedy recovery.

In June, public accounting firm Deloitte released a series of economic forecasts that mostly flew under the radar. In them, three different scenarios were played out over the course of the next five years, examining a worst case, baseline case, and best case recovery.

Based on Deloitte’s findings under the best case scenario, the firm believes the U.S. economy won’t experience the “V-shaped” recovery many investors were hoping for. Moreover, household wealth and capital expenditures (CapEx) won’t get back to their 2019 levels until after 2025.

The most shocking estimate of all, however, was Deloitte’s predicted unemployment rate, which the firm sees remaining above double digits until 2022, even in the best case scenario.

Of course, Deloitte could be completely wrong about all of this. Historically, however, the company’s forecasts have mostly been in line with what’s actually happened.

But the headline here isn’t that a recovery could take much longer than expected, it’s that the current economic trends are too far behind to match-up with an assumed “V-shaped” recovery. Signs of weakness are lingering from the Covid-19 lockdowns, and despite the stock market’s mighty resurgence, the U.S. economy still has plenty of work to do.

The way the market has things priced, you’d never know it, though. The major indexes are back above water. The problem is that most of the cash is getting funneled into a handful of tech firms.

Simply put, market breadth must improve if equities are to continue rising. Today’s stock splits, while exciting, may have only made matters worse in that regard.

And if a rotation out of tech doesn’t happen soon, a broader market sell-off could follow.

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