The Stock Melt-Up Explained in Three Easy Pieces

The global rebound in equities from December’s gut-wrenching sell-off has many calling it a “melt-up,” defined as a sharp and unexpected gain driven by a stampede of investors who don’t want to miss out rather than any fundamental improvements. Including Wednesday’s gains, the MSCI All-Country World Index has rallied 9.13 percent since Christmas. That’s better than the gauge’s 7.28 percent surge in the first four weeks of 2018, a performance many compared to a bubble that was ready to pop — which it did, tumbling 9 percent over the following two weeks.

Although the latest moves come with most economists downgrading their outlook for global economic growth and corporate earnings, it’s not as if the move has been built on smoke and mirrors. Medley Global Macro Managing Director Ben Emons has zeroed in on three plausible reasons for sentiment quickly shifting for the better. First is the rally in China’s yuan, which has reduced the risk of a capital flight from the country that would throw global markets into turmoil. The yuan has appreciated on speculation authorities will continue ramping up their stimulus efforts to keep the local economy from slowing much further — as it did this week. “A stable-to-stronger yuan is positive for global market sentiment,” Emons wrote in a research note. Second, the bond market is paring back the odds of a Federal Reserve interest-rate cut by 2020, showing pessimism over the economy had gone too far. “A lower rate cut probability reduces expectations of a recession in the U.S.,” Emons added. Third, inflation is moderating globally, which takes the pressure off central banks from becoming too hawkish. Inflation rates are back to being lower than the targets set by either the Fed, European Central Bank or Bank of Japan. “These three reasons operate as an ‘elixir’ because they take away the fear of a global recession while at the same also avoid a global overheating,” Emons wrote.