Is This a Market Melt-Up? Hang On as We Find Out: QuickTake Q&A


UBS's Dennis Says Equity Melt-Up Is Earnings Driven

Stocks are hot. Back-to-back records are being set, and more after that as investors keep piling in. Some strategists call it euphoria. Others see panic buying. Is it just another rally, or something that rings alarms, a melt-up? Here’s the difference.

1. What does melt-up mean?

You won’t find it in a dictionary. It’s a term traders use to describe a specific market event: a rapidly accelerating rally driven purely by sentiment. That is, market optimism has come untethered from fundamentals, and investors are chasing returns by piling on an upward-moving bandwagon. It’s all based on momentum and, in its later stages, fear of missing out. At its most extreme, it resembles panic buying -- or the panic selling found in the more familiar market meltdowns.

2. What classifies something as a melt-up?

There’s no exact criteria, but the term is most often used when a market has gone from steady gains to increasingly rapid ones. Consider recent history: Consecutive gains over 13 straight months in the S&P 500 through December were weird, but not hot enough to make a melt-up. Six straight records to start 2018? That’s more like it.

3. Have we seen melt-ups before?

Sure. The dot-com bubble in 1999 and 2000 is a classic example. Prices soared, and investors rode the momentum, while growth in earnings fell way behind growth in share prices. There was no solid foundation to go along with the optimistic expectations, which meant that the run-up amounted to a stock market bubble -- and crash.

4. So is a melt-up the same as a bubble?

No, they’re not synonymous. And again, fundamentals -- or the lack thereof -- are the key. A melt-up can push prices into bubble territory if the surge gets out of whack with things like earnings and sales. But if those catch up to price performance in a reasonable amount of time, it’s possible a bubble would be avoided. In fact, in hindsight it would look like a justified rally -- smart money getting ahead of a trend. The big rallies of 2009 and 2010 are examples.

5. Are we seeing a melt-up right now?

In stocks? Can’t tell. (In bitcoin? That might be another story.) Legendary skeptic Jeremy Grantham believes the equity-market surge looks like it might be a melt-up. The investors driving up prices are betting it isn’t -- or at least that it will continue long enough for them to get out in time. And buyers can point to tangible underlying reasons for the market optimism that’s taking shape at the start of 2018 -- specifically, the potential impact of the tax cuts passed by Republicans last month on the economy and on corporate earnings growth. If Democrats are right that companies will return most of the money from a big cut in corporate rates to shareholders, that may be a good reason to buy.

6. Where does the term come from?

Melt-up is a play on meltdown, which, according to Merriam-Webster, emerged in the 1930s as ice-cream industry jargon "to describe the rate at which ice cream returns to a liquid form." By the 1950s, the word "had begun to be used in reference to ‘the accidental melting of the core of a nuclear reactor,’ and now can also refer to any general rapid and disastrous decline." Like that of an overtired toddler whose ice cream has melted, or a market that suddenly realizes that a melt-up is melting away.

The Reference Shelf

  • GMO’s Grantham wrote a letter to investors that said stocks could be heading for a melt-up.
  • Bloomberg Intelligence’s analysis of whether this ’melt-up’ is reminiscent of the late 90s.
  • Bloomberg’s Michael P. Regan on FOMO and melt-ups.
    Bloomberg’s story on U.S. equities already surging past strategists’ price targets.
  • UBS’s Geoffrey Dennis says the equities melt-up is earnings driven in an interview on Bloomberg Television.
    Before it's here, it's on the Bloomberg Terminal.