Was 2020 the Melt-Up? What Stage of the Cycle Are We In?

In today’s Money Morning…the Fed is now running on empty…a lot of questions, one answer…the upshot…and more…

There’s a line of thought that says we’ll see one last market ‘melt-up’ before the next crash.

That is, a parabolic rise in asset prices before a huge fall.

It’s the kind of thing we’ve seen in the recent past with the dotcom and mining booms.

It happens like this because human psychology doesn’t change.

At the tail end of a bull market, investor greed peaks as everyone scrambles to claim their stake. Markets soar before a painful correction takes place.

The thing is, this time around it’s debateable whether we’ve had the melt-up stage yet.

If we’ve not, then one could still be looking on the horizon.

But on the other hand, we might even be in one right now!

That’s what I want to discuss today.

Because knowing what stage of the cycle we’re in is very important to position yourself for what comes next…

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The Fed is now running on empty

In late 2018, the market was losing steam as the Federal Reserve attempted to raise interest rates back to more ‘normal’ levels.

However, some melt-up proponents held their ground during this time.

US-based analyst Steve Sjuggerud was one of them.

He said in January 2019 as the market was falling:

Folks are focused on fear right now. Their minds are set on everything that could go wrong, ignoring everything that could go right. And that mindset is moving real money…

The most recent Bank of America Merrill Lynch Fund Manager Survey came out this week. The poll noted fund managers have moved toward “extreme bearishness,” making the biggest ever one-month move from stocks to bonds.

This is NOT what happens at a stock market top. Investors should be euphoric. They should be rejoicing the recent fall as an opportunity to buy. And fund managers should be throwing caution to the wind…buying stocks hand over fist.

Instead, investors are worried and gloomy. They’re selling out of the market and buying bonds. This is perfect.

Now, this call from Steve ended up being a pretty good one for 2019.

If you look at the S&P 500 chart below, you can see it was indeed a good year for investors as the market rebounded strongly.



Port Phillip Publishing

Source: Incredible Charts

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So, what happened to turn things around?

This chart tells you all you need to know:



Port Phillip Publishing

Source: Trading Economics

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As you can see, interest rates reversed course in early 2019 as the Fed cut them swiftly to prop up economic growth…or should I say markets.

It’s that action that caused markets to turn back up.

The Fed might be a one trick pony, but it’s a pretty powerful trick they have!

The same dynamic played out again — albeit on steroids this time — when COVID-19 hit in early 2020.

Markets fell sharply in reaction to global lockdowns, so central banks aggressively reduced rates, and then markets shot higher on a tidal wave of cheap money.

Which means, from a purely market perspective, we’re now back where we were heading all along; the top of a raging bull market!

What now then?

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A lot of questions, one answer

So, was the 2020 Fed-fuelled rally the real melt-up moment?

If you think how steep the rises were from the March lows to now, then there’s certainly an argument to be made that last year was the ‘irrational exuberance’ moment.

It’s just that it started from a lower level due to the COVID falls.

Though if I had to guess, I’d say it probably wasn’t.

The fact is, you don’t go from extreme fear to extreme greed so fast when it comes to the wider investing public.

According to industry regulator APRA, 33% of super investors funds are now held in cash and bonds.

That’s back at pre-pandemic allocations.



Port Phillip Publishing

Source: APRA

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This is what I’d call a ‘normal’ state of affairs rather than an extremely greedy or fearful one.

And while some decided to jump back into the market as the rebound took hold, there are certainly still a lot of nerves around with people waiting on a big pullback at the very least.

And they might be right, you never know.

No one knows for sure what will happen next. My point is, I just don’t think we’re at the frothy melt-up stage yet.

The one thing you should note though is that the Fed fuel tank is now on empty.

Interest rates can’t go much lower, unless they go negative!

Incidentally, that would be huge for Bitcoin [BTC] and gold in my opinion, as it would make them better ‘store of value’ assets (at zero interest) than bonds and cash.

Would negative interest rates prop up markets though?

That’s a debateable point.

Such an unusual stance, especially if taken by the holder of the world’s reserve currency — the US — would certainly cause some jitters.

The other government tool is spending.

Which in modern economies means more debt.

On that side of things, debt loads might seem high but there is a lot more room for fiscal support on the short term.

Check out this table:



Port Phillip Publishing

Source: Trading Economics

[Click to open in a new window]

These are the top 10 countries by deb-to-GDP ratios.

The most important one to note is number 10 — the US.

But as high as this debt load is at 107%, you can see that by comparison to a similarly advanced country like Japan, they’ve plenty room to manoeuvre for the next few years.

And with the Democrats now in charge, you can bet this headroom will be used.

China — the other important country — only has a debt-to-GDP ratio of 52.6% according to Trading Economics.

The upshot

There’s no doubt that belief in central bank omnipotence and government largesse is fuelling current markets.

And while governments will take their foot off the pedal when they can, you can bet your bottom dollar that they’ll splash out the cash when they have to, too.

Investors know this.

So, my best guess is that we’ve not had the melt-up phase yet. And I think markets will go higher in 2021.

Of course, I could be wrong, so make sure you manage your risks too.

If you’ve made some good profits recently, maybe bank some and keep some cash in reserve for any short-term dips or to pay down some debts.

Good investing,

Ryan Dinse Signature

Ryan Dinse,
Editor, Money Morning


Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

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