Last December saw a huge fall in equity prices that caused many funds to produce negative returns for the full year. Thankfully for most people, the big falls occurred close to the Christmas Holidays, so many were unaware of it until afterwards.
By the end of January, many funds had recovered their losses and since then the market has tended slowly upwards setting new all-time highs. Analysts now worry that the rally is not being driven solely by changed central bank positions; green shoots in global activity or by earnings being higher than market expectations. Rather it is being driven by money that was switched from equities and is now being moved into equity markets causing the continuous rise.
They worry about a melt-up.
Melt-up is a term traders used to describe a specific market event – a rapidly accelerating rally driven purely by sentiment with high participation, volumes and volatility. Market optimism is not based on fundamentals; rather investors are chasing returns by jumping on an upward moving bandwagon. It is all based on momentum and the fear of missing out. The term is often used when a market goes from steady gains to increasingly faster ones.
In January 2018 after almost a year of slow and steady gains, the S & P 500 Index suddenly took off, growing by 5% to 6% in the month even though many metrics were telling traders, stock prices were already too high. It ended in tears on 5th February.
The dotcom bubbles of 1999 and 2000 were examples of a melt-up. Because prices and volumes soared, not based on a growth in earnings, a stock market bubble was created and it was soon followed by the crash.
A melt-up is different to a bubble. If share prices get ahead of earnings and sales, but if, in a reasonable period of time, these subsequently catch up, a bubble will be avoided and it would look like a justified rally with the fund manager claiming the credit for being smart enough to be ahead of a trend.