Yardeni urges investors to stay the course as U.S. stocks are still in meltup mode

At least one veteran market strategist thinks the market is still in the midst of an extended meltup, despite the recent gyrations, and says things can only improve going forward.

“We remain in record high territory with a significant move higher since early February following the mini-meltdown prior to that,” Ed Yardeni, president of Yardeni Research Inc., told MarketWatch.

The S&P 500 index SPX, -0.22% is down 1% this week, its biggest weekly decline in two months, but is still roughly within 1% from the record set on Aug. 31.

Further bolstering Yardeni’s rosy view of the market is what he claims is a meltup in earnings. To be sure, corporate results have been robust with second-quarter earnings soaring 25% year over year, the best since the third quarter of 2010, according to FactSet.

Steady economic growth also deserves some credit for the stock market’s resilience with recent data testifying to continued strength in the economy.

The Institute for Supply Management on Tuesday reported its manufacturing index jumped to a 14-year high of 61.3% in August from 58.1% in July.

This is especially good news for equities, according to Tony Dwyer, equity strategist at Canaccord Genuity, who argues that a solid manufacturing sector is essential to sustaining the market’s move higher with stocks poised to rise by double digits.

The Labor Department on Friday also said the U.S. created 201,000 jobs in August while the average wage rose by 10 cents to $27.16 an hour.

Yardeni, who projects the S&P 500 to rally to 3,100 by the end of 2018, believes that investors have nothing to fear but the emerging market crisis and the trade war, neither of which fazes him much.

“Strong earnings should continue to help us overcome those fears,” he wrote recently in a note to clients. “The trade war will be resolved in a bullish fashion, in my opinion. Emerging market crises come and go.”

In fact, Yardeni is confident that President Donald Trump will emerge triumphant in his fight with China over trade, which will likely give the market another shot in the arm.

The strategist also thinks that Trump is good for the economy despite the president’s unorthodox approach, a subject he tackles in depth in an opinion piece from Sept. 5.

“There is method in Trump’s madness,” he said, channeling Hamlet. “The difference this time is that I expect a happier ending than in Shakespeare’s play.”

He notes that the president’s high-pressure style in his trade war is depressing other countries’ economies, which forces them to capitulate to the president’s demands.

He may have a point.

The MSCI World Index excluding the U.S. is down 6.6% thus far in 2018 versus the S&P 500’s 7.4% gain.

So how will investors know when to pop open the champagne?

“When Trump declares victory vis-à-vis China,” said Yardeni. “Or when the market starts moving to new highs on China news rather than getting hit by it.”

For now, though, victory appears elusive as investors fret over the impact of trade tensions on the economy. Trump on Friday said the U.S. is prepared to place tariffs on $200 billion in Chinese products and is readying tariffs on another $267 billion in Chinese imports.

In contrast, Ben Carlson, director of institutional asset management at Ritholtz Wealth Management LLC., was not convinced that the current market moves qualify as a meltup.

Carlson’s research has shown that previous meltups have delivered gains of 42% to 84% in a 12-month span before topping out while bull markets have risen 10% to 33% in their last 12 months before succumbing to the inevitable old age.

And it could be that with the bull market entering its 10th year and S&P 500 up 17% over the past 12 months, the stock market may have exhausted its upside momentum for now.

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