Hannibal, the Carthaginian general, was one of the greatest military strategists of all times. The city of Carthage in ancient Roman times was in the spot of modern-day Tunis, in Tunisia. Hannibal was so feared by the Romans that a common Latin expression to express anxiety about an impending calamity was “Hannibal ante portas!,” which means “Hannibal is at the gates!” He studied his opponents’ strengths and weaknesses, winning battles by playing to their weaknesses and to his strengths.

One of Hannibal’s most remembered achievements was marching an army that included war elephants over the Pyrenees and the Alps to invade Italy at the outbreak of the Second Punic War. He occupied much of Italy for 15 years but was unable to conquer Rome. A Roman general, Scipio Africanus, counter-attacked in North Africa, forcing Hannibal to return to Carthage, where he was decisively defeated by at the Battle of Zama. Scipio had studied Hannibal’s tactics and devised some of his own to defeat his nemesis.

So far, the current bull market has marched impressively forward despite 56 anxiety attacks, by my count. (See our S&P 500 Panic Attacks Since 2009.) They were false alarms. At the annual gathering of investment strategists and portfolio managers hosted by Gary Bahre last week, the other strategists were mostly concerned about the overvaluation of stock prices and believed that “something bad” always unexpectedly brings an end to bull markets. No one expects an imminent recession. One rather lame scenario offered by the bears was a massively disruptive cyberattack. Most of them have been bearish on stocks since the beginning of the bull market.

I remain bullish. However, when asked for my what-could-go-wrong scenario, I said that my long-held concern is that the bull market might end with a melt-up that sets the stage for a meltdown. Indeed, on March 7, I raised my subjective odds of a melt-up from 30% to 40%. I lowered the odds of a sustainable bull run from 60% to 40%. So I increased the odds of a meltdown from 10% to 20%. In my mind, a melt-up would set the stage for a meltdown. However, in this scenario, the meltdown might be a 10%-20% correction or a short bear-market plunge of 20%+, but it would not necessarily cause a recession. So the bull market could resume relatively quickly.

The latest valuation and flow-of-funds data certainly suggest that the melt-up scenario may be imminent, or actually underway.

Consider the following:

(1) Valuation melt-up. The Buffett Ratio is back near its record high of 1.81 during Q1-2000 (Fig. 1). It is simply the US equity market capitalization excluding foreign issues divided by nominal GDP. It rose to 1.69 during Q4-2016. It is highly correlated with the ratio of the S&P 500 market cap to the aggregate revenues of the composite (Fig. 2). This alternative Buffett Ratio rose to 2.00 during Q1 of this year, matching the record high during Q4-1999. It is also highly correlated with the ratios of the S&P 500 to both forward revenues per share and forward earnings per share (Fig. 3 and Fig. 4). All these valuation measures are flashing red.

(2) ETF melt-up. The net fund flows into US equity ETFs certainly confirms that a melt-up might be underway. Over the past 12 months through April, a record $314.8 billion has poured into these funds (Fig. 5). That was led by funds that invest only in US equities, with net inflows of $236.4 billion, while US-based ETFs that invest in equities around the world attracted $78.4 billion in net new money over the 12 months through April.

Some of the money that went into equity ETFs came out of equity mutual funds (Fig. 6). Over the past 12 months through April, net outflows from all US-based equity mutual funds totaled $155.3 billion, with $163.7 billion coming out of US mutual funds that invest just in the US and $8.4 billion going into those that invest worldwide.

So the net inflows into all US-based equity mutual and indexed funds totaled $159.4 billion over the past 12 months, $72.7 billion going into domestic funds and $86.7 billion into global ones (Fig. 7). These totals don’t seem to be big enough to fuel a melt-up. However, the shift of funds from actively managed funds to passive index funds is significant and could be contributing to the melt-up. That’s especially likely since money is pouring into S&P 500 index funds, which are market-cap weighted. This certainly explains why big cap stocks, like the FAANGs, are outperforming.

(3) FAANG-led melt-up. Since the start of the year, the market-cap weighted S&P 500 is up 8.9%, while the equal weighted index is up 7.2% (Fig. 8). Joe calculates that the market cap of the FAANGs is up 41.4% y/y to a record $2.49 trillion, while the market cap of the S&P 500 is up 14.3% to $20.95 trillion over the same period (Fig. 9). In other words, the FAANGs account for 27.8% of the $2.6 trillion increase in the value of the S&P 500 over the past year.

US Economy: Warm Bodies. Is the US economy running out of warm bodies to employ? The unemployment rate is down to 4.3%. Job openings are at record highs. Payroll employment gains have slowed significantly over the past three months. Demographic trends may be exacerbating the situation.

The Baby Boomers are retiring. At the start of their careers, they mostly expected to work for one company over their entire careers. Of course, that was not the case for many of them, but they did mostly have a “careerist-materialist” attitude about their jobs and lives. The Millennials aren’t rushing into the labor force as did the Baby Boomers. More of them are going to college, especially the women among them. When they land a job, they aren’t as committed to keeping it for the rest of their careers. They may be willing to accept lower wages in exchange for more flexible (and less demanding) work. They have a more “lifestyles-minimalist” attitude. Melissa and I have been studying these trends. Let’s analyze the latest employment report with this perspective in mind:

(1) Earned Income Proxy. First, let’s not get too carried away by the weakness in May’s payrolls. They were up only 138,000, and the previous two months were revised down by 66,000 in total, as Debbie reports below. Private-sector payrolls are up only 126,300 per month on average from March through May. Yet over this same period, the ADP measure of private-sector payrolls is up 227,300 per month on average (Fig. 10).

Our Earned Income Proxy, which tracks private-sector wages and salaries in personal income, rose 0.3% m/m during May to a new record high (Fig. 11). It is up solidly by 4.3% y/y, auguring well for consumer spending.

(2) Labor force. Again, the actual data belie some of the concerns about a shortage of warm bodies to hire. The y/y growth of the labor force, based on the 12-month average, has exceeded 1.0% for the past 10 months (Fig. 12). That’s holding around its best performance since the fall of 2007. Workers are still dropping out of the labor force. However, the y/y growth of NILFs (i.e., the working-age population not in the labor force), based on the 12-month average, fell to 0.5% in May, the lowest since March 1998 (Fig. 13). The growth of NILFs who are 55 years old and older was 2.4% over the past 12 months, while younger NILFs fell 1.8% (Fig. 14).

The percent of the labor force with a college degree was a record 34.5% during May (Fig. 15). That’s up from 25.1% when the oldest Millennials (born in 1981) turned 18 years old during January 1999. This certainly implies that more young adults are going to college and adding to the number of NILFs while they are doing so.

(3) New normal. Despite the cyclical improvement in the growth of the labor force recently, the new normal in the labor market may be slower growth in both the labor force and employment, as low as 50,000 to 110,000 added per month. According to a FRB-SF paper from last October, such a pace would maintain a near-natural rate of unemployment around 5%, taking into account lower labor force participation rates resulting from retiring Baby Boomers over the next decade.

(4) Wages. Given that the job market appears to be so tight, the puzzle is that the pace of wage growth has remained so slow. Average hourly earnings for all employees on private nonfarm payrolls has risen just 2.5% y/y through May. It seems plausible that wages could be suppressed as retiring Baby Boomers with a lot of experience, and, thus higher salaries, are handing off the baton to younger less experienced workers. At the same time, job openings are at record highs. And small businesses, which make-up the lion’s share of the US economy in terms of jobs, are complaining that good employees are hard to find.

So employers are probably being forced to hire some employees that are not totally qualified, or just not that good. And employers might not be willing to pay those sorts of folks the big bucks. Thinking out loud, something else that could be at play is that Millennials who are entering the workforce now as the Baby Boomers retire might also not be demanding the big bucks. Some may prefer a more balanced lifestyle to a high-paying, high-stress job. Millennials and their inclination for minimalism and life experiences over “stuff” is a trend we have spotted and discussed previously.

In any event, employers are reporting that lots of low-wage workers today aren’t very loyal and don’t even show up, according to a 6/2 WSJ article. In it, the owner of a staffing agency was paraphrased as saying that “workers who skip out of jobs, whether to hang out with friends or care for family members, face little repercussion. With the unemployment rate so low, they can quickly find another low-wage job when they are ready to work.”

Nevertheless, the article observed that the “national tilt toward low-wage job growth now shows signs of shifting, which could lead to bigger increases in national pay raises.” During the past year, better-paying fields like health care and professional & business services have increased payrolls, while lower-wage retail payrolls have been cut. For example, payroll employment at all retail stores fell 80,100 over the past four months through May.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.