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WALL STREET INSIGHT

Markets unfazed by US government shutdown

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In a "melt-up", investors terrified of missing out rush into the market, causing gains of a similar cascading nature to the losses in a market meltdown.

US STOCKS rose last week as a "market melt-up" continued despite a government shutdown and a crash in digital-currency markets.

There could be more gains this week as long as tech stocks such as Netflix and industrial giants such as Caterpillar post earnings that live up to high expectations.

The shutdown in Washington could cause some wobbles, but a major selloff seems unlikely.

Stocks even gained last Friday as news reports warned that Republican and Democratic senators would fail to strike the deal needed to keep federal agencies open.

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Sure enough, all but the government employees deemed "essential" were furloughed at midnight on Friday (Saturday 1pm, Singapore time).

One strategist said traders were sanguine because the stock market had not suffered during recent shutdowns under former presidents Barack Obama and Bill Clinton.

There's even a cynical Wall Street school of thought that the US functions better when the administrators are out of the office.

"The statistical evidence seems to indicate that the market does work its way through it," said Quincy Krosby, chief market strategist at insurance and investment firm Prudential Financial.

"If there's a temporary pullback, that could be positive because it takes a little bit of froth out of the market."

By all accounts, there is a lot of froth bubbling up in the stock market.

The Dow Jones Industrial Average was already sitting on its best start to a year since 2003 when it rose by 323 points - one of the biggest gains in recent years - on Wednesday.

Last week, the blue-chip index also smashed a recently set record of the fastest 1,000-point move in its history, closing the gap between 25,000 and 26,000 in about a week.

If the Dow continued rising at this pace, it would double by the end of the year, and record its biggest bull market percentage gain in history.

This is the nature of a "melt-up", as investors terrified of missing out rush into the market, causing gains of a similar cascading nature to the losses in a market meltdown.

Joe Bell, senior market strategist at trading-research firm Schaeffer's Investment Research, said one indicator of momentum in the Standard & Poor's 500, the Relative Strength Indicator, is at its highest level ever tracked in charts that go back to 1993.

Looking at charts where there are previous spikes in the RSI "has showed underperformance by the market going out one week and one month, but, interestingly enough, six months to a year out, we see outperformance," said Mr Bell.

"It just hammers home the point that we could be due for a little bit of a breather or consolidation. But when the market moves this far this fast, it isn't naturally the end of the bull market."

Why is the market surging?

"Strong earnings, it's pretty simple," said Oliver Pursche, chief investment strategist for broker-dealer Bruderman Brothers.

"If you look at the corporate world, not just corporate America, corporations and especially multinationals went through earnings recession from 2015 through the first-half of 2017."

In the last couple of quarters, earnings growth has rebounded and "markets are reacting very favourably to that as they should".

One of the companies that saw the biggest gains associated with economic and earnings optimism is mining and construction machinery maker Caterpillar.

Shares of the bulldozer manufacturer have almost doubled over the last year, amid hopes that tax cuts and faster Chinese growth would revive mining and infrastructure-building activity worldwide.

General Electric, which makes machinery for energy, aerospace and utility companies, has not participated in the industrial-stock rally.

That's partly because of a mistimed bet on coal-fired power plants and partly because of a complex structure, which new chief executive John Flannery may address in this week's earnings call.

Another sustainable source of fuel for the rally is the merger market, stimulated by painful transformation in the healthcare, media, retail and telecommunications businesses.

Some of the biggest deals in history have emerged in the last 18 months, as companies threatened by "disruption" seek radical changes of direction through acquisitions.

These mega deals which include pharmacy chain CVS Health's agreement to buy insurer Aetna, phone company AT&T's purchase of Time Warner and entertainment conglomerate Walt Disney acquiring movie and television studio 21st Century Fox, could continue this year.

"We are more bullish on M&A spending than on capex," said analysts at brokerage Bank of America Merrill Lynch Global Research, in a note to clients.

"Moreover, disruption has resulted in record dispersion in growth expectations for the 'haves' and 'have-nots', pressuring industry incumbents to compete by increasing scale or buying technology to keep pace."

One of the biggest "disruptors" in the last decade, and one of the biggest gainers on the stock market, is streaming service Netflix, which Wall Street analysts expect to report another quarter of head-spinning profit growth.

Some of the hottest stocks of 2018 so far, those directly associated with bitcoin and digital currencies, tumbled alongside the crypto-currencies themselves last week.

At one point early in the week, bitcoin had fallen as low as US$9,100, trading at less than half its December peak around US$20,000.

Bitcoin came storming back late in the week, possibly as a response to the selloff in the dollar related to the shutdown.

But the selloff, which was sparked by concerns about regulation, was a reminder of how risky speculation on these digital currencies can be.

There's a tendency among market followers to think of bitcoin as the only digital currency, much as people sometimes group all sodas under the "coke" bracket, said Joe Kinahan, chief market strategist at TD Ameritrade.

While the mathematical and computer protocols underlying these digital currencies is likely to be here to stay, it's anyone's guess which brand of crypto-currency will eventually be preeminent, Mr Kinahan said.

This week, further volatility in digital currencies could spill over into the stock market, spurring speculation or causing a flight from risk.

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