Following the correction that took hold from autumn of 2018, the global stock market has enjoyed its best start to a year since 1991. It’s up over 14% so far with further gains recorded today on news China has revised up its 2019 GDP expectations. And Larry Fink, the chief executive of BlackRock, the world’s largest asset managers, believes the positive trend for equities is set to continue. In fact, he believes the signs are there that a ‘melt up’ is beginning.
The term ‘melt up’ refers to a trend that traditionally marks the last phase of an extended bull market. Investors lose sight of risks and invest heavily, quickly driving stock markets upwards. Often the greatest gains of the whole bull period come over the final ‘melt up’ phase. The problem is that either a major correction, or market crash, follows. Investor enthusiasm creates bubble that pops with a hard landing.
For anyone investing online, this should temper enthusiasm. With markets falling hard and fast at the conclusion of a melt up, this phase of a bull market is very hard to time. It’s difficult to pull out, or at least stop investing additional cash, while big gains are still being made. But not pulling out on time could mean serious short term losses.
Mr Fink believes that the 2019 market so far represents a strange anomaly. Equities valuations have been rising but money has actually been continuing to flow out of the stock market. Markets data provider EPFR estimates a total of $90 billion has been withdrawn from equities funds. And Mr Fink believes that the fact so many big investors are currently ‘underinvested’ means that cash will, at some point, start flowing quickly back into equities due to improving global economic growth data and dovish policy coming out of central banks.
With valuations rising despite capital flowing out of equities, a reversal of that flow would be expected to supercharge short term gains. That, believes Fink, could herald the beginning of a melt up period. If he’s right, now would be a very good time to invest. But holding on too long in the hunt for the top of the market would then become a high risk strategy. Getting out early and missing out on the market’s peak is the way to play a melt up. Be warned!