Advertisement

Get set for a stockmarket melt-up

Stocks are massively overpriced, but the benign economic backdrop suggests that the markets will march on. Indeed, the most likely scenario now, say some observers, is a dramatic 'melt-up'.

878_MW_P06_Markets
Winter hasn't come for the bulls yet expect another run

"Happy New Year!" says Randall Forsyth in Barron's. The first week of the year saw the Dow Jones index burst through the 25,000 mark, while the Nasdaq Composite index eclipsed 7,000. The post-crisis upswing, which began in March 2009, is now the second-longest US bull market on record behind the 1990-2000 surge.

Advertisement - Article continues below

Ever since 2016, when it had several wobbles, the upward momentum has been relentless, says Robin Wigglesworth in the Financial Times. The S&P 500 has just equalled the 1960s record for the second-longest streak of trading days without a 5% decline: 386 days. The longest was 394 days, a milestone set in the mid-1990s as the dotcom bubble got going. It looks set to be surpassed later this month. "The sense that a setback is overdue feels nearly palpable."

The economy is in good shape

Yet it's hard to see what might cause the US-led global rally to stop or reverse. The world economy is in its best shape since the global crisis. Manufacturing surveys point to continued solid growth. Expected US earnings growth has been revised upwards following the Trump administration's tax cuts.

The benign backdrop suggests that stocks will march on, even though they are massively overpriced (see right). Indeed, the most likely scenario now, says Jeremy Grantham of asset-manager GMO, is a dramatic move up, not down: a market "melt-up", or "blow-off phase".

Advertisement - Article continues below

Grantham called the Japanese bubble of the late 1980s, the US housing bubble in 2006 and the US stockmarket recovery in 2009. He points out that previous major bull markets, including the 1989 Japanese stock bubble, the 1929 S&P 500 bubble and the 2007 US housing bubble, culminated in an average final surge of at least 60% over 21 months.

Euphoria is mounting

In those bubbles, the final melt-up accompanied a period of euphoria among investors before the peak and collapse.If there is a melt-up, history suggests that we should expect a subsequent slump of 50%. There are signs that the euphoria is mounting; the "touchy-feely measures of market excess", as Grantham puts it, are "falling into place". The "increasingly optimistic tone of press and TV coverage" is one indicator. "A mere six months ago new market highs were hardly mentioned and learned bears were everywhere." Another snapshot of investor sentiment is the regular survey from the American Association of Individual Investors, adds the FT's John Authers. Bulls are outnumbering bears by the greatest margin since the rally began, apart from just before the market slide of 2011.

Advertisement
Advertisement

Recommended

The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
7 Aug 2020
BP has slashed its dividend – and markets love it
Income investing

BP has slashed its dividend – and markets love it

BP has bowed to the inevitable and cut its dividend in half – and its share price promptly rose. John Stepek explains what it means for shareholders …
4 Aug 2020
Listed companies are dying out, and that could have serious consequences
Stockmarkets

Listed companies are dying out, and that could have serious consequences

Private equity is taking over from public stockmarkets as the biggest provider of capital to companies. That’s bad for investors and bad for society a…
3 Aug 2020

Most Popular

Don’t despair on dividends – these companies could be set to bring them back
Income investing

Don’t despair on dividends – these companies could be set to bring them back

The value of dividends paid out by UK stocks has plummeted this year as companies “rebase” their payment policies. But things could soon start to look…
6 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020
Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020