People wise in the ways of the stock market have been talking about a “melt up” – “a dramatic and unexpected improvement in the investment performance of an asset class, driven partly by a stampede of investors who don’t want to miss out on its rise, rather than by fundamental improvements in the economy” according to Investopedia.
What You Need To Know
The melt-up has met with a couple of dives, including a December 2018 correction, and recovered. May 2019 was the most recent sudden dive, with a fall of 6.6%. It’s the worst May drop since May 2010 and could have signalled the end of a melt-up – but Dr Steve Sjuggerud of Daily Wealth has another view.
Dr Sjuggerud notes that although May’s massive drop was the worst May fall since 1950, the history of the market suggests that big drops in May are generally followed by strong returns the following year. That is, investors buying after big losses in May were likely to make big gains a year later, with one year returns historically often storming back at well over 10% – even up to 25-30% since 1970.
Naturally, this big swing doesn’t happen every time, but it’s a pattern than Sjuggerud sees “as the Melt-Up kicking back in”.
However, Bloomberg’s Lu Wang is more conservative in his analysis. The S&P 500 has bounced back from the May drop, but Wang notes that the rise was in safer sectors such as utilities, real estate and consumer staples, rather than investors embracing the riskier stocks that flag a bull market.
With a cautious eye, then, it looks like there’s life in the old Melt Up yet, through some judicious selection of investments.