Are We Experiencing a Stock Market Melt Up?
Anyone who has invested any money can easily tell you what a stock market melt down is. We experienced one in 2008-2009 when the market plunged close to 50%. Then we experienced another around 2000 when the dot com bubble burst. But ask investors about a stock market melt up is and they might be scratching their heads.
What is a Stock Market Melt Up?
A stock market melt up is the opposite of a melt down. Let’s go back to the formation of the melt down in 2008. The root cause was a melt up of the housing market.
Everyone was bitten by the real estate bug. You could buy a house and sell it in 45 days and earn a $50,000 profit. Or you could buy a house, take out a credit line, upgrade everything, and a year later double your money.
No one thought prices could fall. And for a while, they were right. Prices were only going up. But then cracks began to appear and the next thing we knew, the housing market collapsed, along with economies around the globe.
This is what a stock market melt up would look like.
Since the beginning of 2018, it seems we were in a melt up. The market just continued to rise, each and every day. It wasn’t until early February when some investors got scared and sold, causing the market to drop 10% in a few short days. Since then it’s been somewhat volatile.
And during this time, when the market didn’t close lower by hundreds of points, there were wild daily swings. In the morning the market might have been up 400 points only to close down 300.
While this event was a correction and they happen all of the time, is it a sign of more things to come?
Let’s look at some facts about this stock market to come to a conclusion on this market being a melt up.
3 Things to Consider About the Stock Market Now
1. Near Record Long Bull Market
The bull market we are currently in has been going on since 2009, or roughly 9 years. This ranks second as the longest bull market in history. The longest one ever was from 1990 until 2000 which ended with the dot com bubble popping. That bull market run lasted 113 months.
But each bull market and for that matter, bear market, is unique in its own right. Some last a long time, like we are experiencing now. Others, like the one from 1966 to 1968 only last a short period of time.
What can you take away from this? Not much really. I say this because no one knows when the market will pull back and enter a bear market. It is bound to happen, but no one can predict when exactly this will be.
Of course, some people will get lucky and call it. Then they will be on magazine covers and write a book, acting like they can predict every future event for the stock market.
But don’t be fooled. They were simply lucky with their guess.
2. Inflation is a Killer
Just like inflation causes you pain from rising prices on the things you buy, rising inflation is a killer to a bull market too. This shouldn’t surprise anyone then that since the Great Recession inflation has been under control.
But now consumers are getting confident. They are beginning to spend more and companies are raising wages. Add in the tax cuts and higher inflation is looking more and more likely.
This was the main reason for the market correction in February. Investors saw higher inflation and higher interest rates as a result and became worried. They know that as inflation rises, corporate earnings and the economy begins to slow. And as a result, the stock market slows down too.
What can you take away from this? You need to pay attention to inflation. Luckily with interest rates still low, the Federal Reserve has lots of room to work with to help keep inflation in check.
But this doesn’t mean it can’t spike and surprise everyone. Keep an eye on increasing interest rates and mortgage interest rates.
3. Irrational Investors
The biggest worry for a stock market melt up is irrational investors. Just like we saw with the collapse of the housing market, many investors today think stocks only rise.
This causes them to jump into the stock market for fear of missing out. The result is ugly. Just like how it took years for housing prices to come back, when the stock market collapses, it will take years for it to come back too.
Most investors who invest at the high will run away licking their wounds, afraid to invest again.
What can you take away from this? Ideally, you should not be sitting on the sidelines afraid to invest right now. The economy is strong and corporate earnings are rising. The result is a stock market that will continue to rise over the long term. You don’t want to miss out on this.
But you have to be rational at the same time. Don’t put all of your money into high risk stocks. Build a diversified portfolio made up of high quality large cap stocks, small cap stocks, international stocks, and a good percent of bonds to match your risk tolerance.
And don’t forget about cash. There is nothing wrong with having a nice pile of cash sitting by. The last thing you should do is put everything you have into a couple stocks right now.
The next to last thing you should do is not invest at all. Take advantage of the rising market, but be smart about it. See 3 Ways to Safely Handle Stock Market Volatility.
We very well could be in a stock market melt up. But this doesn’t mean you shouldn’t invest in the market. You just have to pay attention and invest in a well-diversified portfolio.
Eventually, the stock market will tumble as it is cyclical after all and it rises and falls. You want to focus on the long term with a portfolio built for your risk tolerance.
Doing this ensures you can withstand any falls that will come and stay invested. The end result will be better returns and less worry over the short term.