Economic 'Melt Up'

 Today, the Bank Of America said that the stock market was getting ready for an economic 'melt up' in the first quarter of the new decade. For this reason, Investing Port will be briefly analyzing the concept of 'economic melt up' in this article.

A melt-up is a dramatic and unexpected improvement in the investment performance of a class of an asset, which is partly driven by a rush of investors who do not want to miss out on its rise, rather than by fundamental improvements in the economy. The profit created by 'melt up' are considered to be unreliable indications of the direction the market is ultimately headed. According to some reviews, melt ups often precedes melt downs.

 

When the stock  market "melts down", major market indexes tank and is usually triggered by some sort of geopolitical event for example wars, terrorist attack, and so on; or the beginning of an economic downturn like recession, depression and more. An economic 'melt up' is the antonym of an economic 'melt down' and is usually triggered by a decrease in interest rates, strong earnings reports from top companies as well as economic recovery. In the case of an economic 'melt up' the first thing investors usually think about is how to buy stocks first. In the case of major stock market indexes, an economic 'melt up' can result in an increase ranging from 20% to over a 100% which is quite higher than normal.
According to historical review, financial analysts saw the 'run up' in the stock market at the beginning of 2010 as a possible 'melt up' because unemployment rate was on the increase, commercial and residential real estate values also suffered and retail stock investors continued to pull their cash out of the stock market. Another example of economic 'melt up' is the Great Depression of 1929-1932.

 

Focusing on fundamental factors and ignoring economic 'melt ups' usually begins with having a strong insight of economic indicators, which could come in the form of leading indicators or lagging indicators. These indicators usually gives an investor the opportunity to forecast the direction the stock market is likely to follow and overall health of the economy. Leading indicators are factors that will usually shift before the economy starts to follow a particular pattern. An example is the Consumer Confidence Index (CCI), which is a leading indicator that reflects consumer perceptions and attitudes like how they spend and money sufficiency. A rise or fall of this index gives a strong indication of the future level of consumer spending, which accounts for 70% of the economy.

Lagging indicators usually shift only after the economy has begun to follow a particular pattern. These technical indicators trail the price movements of their underlying assets. Examples of lagging indicators are the moving averages and a host of others.

Many investors try to avoid economic 'melt ups' and the impact on their emotions when gambling rather than focusing on the fundamentals of companies.