Lots of “melt-up” talk these past few days. Today Larry Fink of Blackrock suggested the risk for stocks is for a melt-up as opposed to a meltdown. The rationale: Underinvested cash that needs to chase. I outlined a similar scenario as as possibility last week in Combustion. But it speaks to sentiment which is extremely bullish at the moment.
You can see it in the verbiage some people use: “All in no matter what happens”. No really. Oh kay.
It’s times like these when it may be worth to step back a bit and gain some broader perspective. A look at some long term $DJIA charts not only helps gain that perspective, but also reveals a stunning fact.
It’s quite eye opening actually.
Here’s a monthly $DJIA log chart dating all the way to 1900:
What’s that chart tell us besides stocks going up in the long term? On a log basis this chart tells us that $DJIA hit a key trend line in 2018 connecting the 1929 highs and the 2000 highs. Pretty freaky to think that the $DJIA reacted to a trend line originating 89 year ago after creating the trend line in 2000. But nevertheless there it is.
Following the 1929 crash a support trend line was formed in the 1970s. That trend line has never been touched since the 1980s. It got somewhat close during the great financial crisis, but it never tagged it.
One drawback of using log charts on such a long time frame though is that the first 80 or even 90 years of the chart take up the most space. It makes it look like as if the trend in recent years basically fits within the historic trend. And it does on a log basis.
But the log chart hides a pretty wild fact, hence let’s use a linear chart to draw out that fact:
Oh no, I’m not highlighting the asymptotic nature of the linear chart. That would be too easy.
I’m highlighting THIS:
It took over 70 years for the $DJIA to hit 1000, it then took 34 years to hit the 14,000 level in 2007. Then came the great financial crisis and $DJIA dropped back into the 6K range. But that’s not the stunning fact. The stunner is what happened next. In 2013 the $DJIA broke above the 2007 highs. In just 5 years from 2013 to 2018 the $DJIA rallied from 14,000 to 27,000 last year.
You do realize what this implies? 48% of the $DJIA’s entire point gains since 1900 have come in just the last 5 years (not counting 2019 yet, since we haven’t made new highs yet on $DJIA).
That’s kinda mind blowing. Especially considering since there’s been barely any growth in the economy or corporate income for that matter. Consider:
That’s 14% growth in GDP since 2013 and 3% in the national income. Now granted the $DJIA does not represent the overall economy nor the national income, but it gives a snapshot of how some (big) pockets in the stock market have accelerated away from the underlying economic and income picture.
Going back to the chart we can note a vast acceleration in the $DJIA since the mid 80s once the $DJIA broke above the 1,000 level.
I wonder what has happened since that time?
Oh I know:
The debt economy took off and the age of permanent central bank intervention began:
48% of the $DJIAs 118 year point gains have come in just the past 5 years. If people are expecting a melt-up from here what exactly have the last 5 years been?
Puts it all in perspective doesn’t it?
I’ll finish off with another perspective: Considering that 48% of gains have come in the past 5 years the first chart highlights the size of the technical correction risk using some basic fib levels:
Best hope we never test that lower trend line. But just a retrace to the .382 fib would take the $DJIA to 16,800. And that’s only bringing it back to the beginning of 2016. That’s right, giving just back 3 years of gains out of 118 years would imply a near 40% drop from the current highs.
Good thing that, according to Larry Fink, there’s no meltdown risk, only melt-up risk.
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Categories: Market Analysis
Just a heads-up, Sven – typo at “permeant”
Thanks Tim! I need an editor 🙂
Great historical perspective and stunning context provided of last five years – ironically about when I went almost all to cash and yield-reaching preferred stocks. Clearly world central banks are primary driver. I do wonder how much massive shift to passive investing in recent years is also a contributor. Surely some impact, but tough to quantify.
It is tough to quantify, passive investing clearly has led to automated allocations. Active investors such as hedge funds are lagging the comp. Don’t use discerning value assessment just chase the index is the, dangerous in my view, message.
If you count in points it looks impressive, but take a look at it using percentage: The rise from 1.000 to 14.000 ist a stunning 1300% while the rise from 14.000 to 27.000 is just a mere 92% rise. If the Dow is up to make the same development it made from 1.000 to 14.000 within 34 years (2007) then the Dow Jones should reach 196000 (14000 x 1300%) in the year 2041 (2007 + 34 years). The big boys do not count in points, they look at gain in percentage.
All true, but nevertheless the index has gained 92% in just 5 years.
Once the market pulls back (melts-down instead of up), MMT wil come to the rescue. Better get used to Hyperinflation accounting.
Hi, good article! Really crazy to look at this melt-up market. Think 34 years should be 24 years? Cheers
thanks. One could make that point as it was the point of the breakout.