Is A "Melt Up" Coming for Stocks?

Is A "Melt Up" Coming for Stocks?

over 4 years ago2 mins

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US stocks have had a year to remember, and as sheepish funds scramble to get in on the action, the final two months of 2019 could lead to a “melt up”...

What does this mean?

The S&P 500 is up more than 20% in 2019 – hitting another record high this week. Every other time since 1950 that shares have had a rally of that size in the first 10 months of the year, they’ve continued to gain throughout the last two months. In fact, on the previous seven occasions when the market posted gains this big through the end of October, stocks rose an average of 6.2% over the course of November and December 📈

Source: LPL Research, FactSet
Source: LPL Research, FactSet

Why should I care?

If you’ve been getting worried about the warning signs coming from the global economy, you’re not alone. Equities, though, have kept grinding higher, fueled in part by unexpectedly low interest rates from the Federal Reserve. The central bank has cut US rates three times in 2019, despite investors’ expectation at the start of the year that borrowing costs in the world’s largest economy would increase.

This pattern has wrongfooted many pros – including Saxo Bank, which this week issued a “mea culpa” that reversed its previously bearish call on stocks. Rate cuts have led many investors to conclude that “there’s no alternative” to buying shares, causing the bank to concede its “underweight” equities allocation had been proved wrong:

“Given the market reaction, despite overwhelming data suggesting trouble ahead, we now must contemplate a melt up scenario in US equities like the one in 1999-2000.”

Saxo’s reverse ferret is an example of when money managers are only able to ignore a market rally for so long. Eventually they join the party – especially at the end of the year, when funds have to report their performance. That’s known as a melt up – and it’s that capitulation by the laggards that tends to drive the rally further 🚀

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