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Are markets in a ‘melt up’?

Melt up? Yup, you didn’t read this incorrectly. You asked the same question as I did. “Surely that’s a mistake. It should be melt down?” But no, it’s a phenomenon. Many investment commentators are saying the markets are in a ‘melt up’ as we speak.

A ‘melt up’ is a situation where markets are running so hard pushing up performance due to the sheer volume of FOMO investing but where earnings prospects are low. There is a mismatch between sentiment and fundamentals, which can present itself with many investment opportunities.

All things virus related have impacted companies and economies really hard. The stimulus pumped into the global economic system has achieved new heights since the Global Financial Crisis in 2007. Economies are hurting and we as global citizens will be paying for the economic support packages for much of our lifetimes.

However, you compare that situation to the fact that we have seen the most rapid recovery in the history of markets from the most recent March/April lows. To put it into numbers, the ASX 300 is currently trading at 18.1 times earnings, when compared with this time last year it was trading at 15.9 times earnings. Current market valuations do appear somewhat aggressive, given the economic and corporate backdrop one year on. Add to this the fact that rising markets tend to create their own momentum and you guessed it – we get a ‘melt up’.

Some short term trading sentiment has left a lot to be desired in the current market. For example I was amazed by the Robinhood traders buying Hertz stock between May 26 and June 8 and gaining a return of 900%, whilst the company had a high likelihood of becoming worthless due to its Chapter 11 bankruptcy proceedings. This is seriously risky business.

Is it a bubble? How long will it last? What will be the catalyst for change in sentiment? Who knows.

But if you’re in it for the short term, not the long term, be warned. Fingers (and even Robins) can get burnt.

 

Disclaimer: Please note that these are the views of the writer, Camilla Love, Managing Director at eInvest and is not financial advice. To find out how to invest in our active ETFs, visit here. The product disclosure statement and more can be found at www.einvest.com.au. If you’d like to keep learning further, please feel free to follow any of our socials listed below.