Pausing the "Melt-Up" By: Gabriel PotterMBA, AIFA® 2020.09.08

A 400-point plunge in the Dow Jones Industrial average used to be noteworthy.  I remember it happening in 2007 with moderate apprehension.  This was way before the 2008 housing and financial crisis showed us all what a painful sustained decline looked like.  This was way before the March 2020 COVID crash showed us how quick a real shock could be.  But now it doesn’t seem to be a big deal.

The DJIA was at 29,150 last Thursday morning.  By midday of last Friday, it fell to 27,700.  That’s an intraday trading drop of 1500 point in about 24 hours.  For the majority of the market watchers, this retraction is mostly a non-event.  They attribute the cause to a stock-split from Apple, a lack of Tesla exposure key indices, and a broad claw back in technology stocks.

There are three reasons nobody cares too much about the recent decline:

  1. The denominator is high.1500 points over a 29000 index is about a 5% pullback.We saw something closer to a 30% decline back in March.This pales in comparison.
  2. Technology stocks have been on a massive winning streak in the post-COVID crash recovery.Value stocks and small cap companies might still be licking their wounds, but the biggest technology names continually hit new highs recently and they have been taking larger and larger proportions of major indices.This might level the playing field a bit.
  3. The economy has been looking weaker than the stock market for months.With this sort of market “melt-up”, most analysts were calling for a pullback for quite a while.Moreover, many bullish analysts – both shops (Morgan Stanley, Goldman Sachs) and individuals (Ed Yardeni) – believe a larger correction is possible and could be healthy for the markets.

 


Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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