Understanding melt-ups
A melt-up occurs when investors rush into the market, driving up stock prices at an unsustainable pace. In many ways, a melt-up has all the hallmarks of a bubble, yet it is a bubble created at a breakneck speed. This surge is often triggered by low interest rates, excessive optimism, or a lack of better investment alternatives. Unlike normal run-of-the-mill bull markets, where rising stock prices reflect improving corporate performance and economic conditions, a melt-up is primarily driven by emotional and psychological factors.
One of the most recent melt-ups is the run-up to the 2008-09 financial crisis, where housing prices soared as banks issued risky subprime mortgages to unqualified borrowers. Fueled by easy credit and speculation, real estate values climbed rapidly, with many believing the market would never decline. When borrowers started defaulting, the bubble burst, triggering a severe market collapse.