Storm clouds appear to be gathering over Wall Street, with many analysts saying a downturn is inevitable. But before the party winds down, some expect an explosive pre-crash rally — known as a “melt-up.”
Melt-ups usually occur without any obvious economic reason for the gains. They happen when investors buy assets based on greed, or fear of missing out, instead of fundamental improvements. First, some quick context: The past five years have been very, very good for investors. The S&P 500 has grown by nearly 90%, and the tech-heavy Nasdaq has grown over 140%. That includes two years of a pandemic that shuttered businesses and snarled global supply chains.
Now the market is grappling with the sobering reality that all bull runs end eventually. Market watchers say that time may be near amid high inflation, an increasingly hawkish Federal Reserve and geopolitical turmoil. Recently JPMorgan CEO Jamie Dimon warned of “storm clouds on the horizon,” former New York Fed president Bill Dudley said he believes a recession is “inevitable” and the yield curve is inverted — when short-term debt pays out more than long-term debt, considered a sign that a bear market could be ahead. Yet some analysts are predicting a stock market melt-up, in a rush of irrational buying that sends assets soaring just before the bull market’s collapse.