The global economy has just had its worst year of the modern age and 2021 has not got off to the best of starts either. Yet stock markets appear impervious to bad news, with the MSCI World Index of developed market shares 10% above its pre-crisis peak. There are a number of reasons why equity markets are so hot.
Central bank action. Led by the US Federal Reserve, central banks were quick to respond to the market turmoil that accompanied the first wave of the coronavirus pandemic in February and March last year. Interest rates were cut and money was pumped into the global economy through asset-purchase schemes known as quantitative easing. Just as importantly, the Fed gave the impression that it would not allow share prices on Wall Street to fall too far.
Vaccine optimism. Stock markets tend to be influenced by the outlook in the future rather than the current state of the world, and are convinced that growth will pick up sharply once mass vaccine programmes allow governments to relax physical-distancing regulations. The assumption is that from the spring onwards activity will surge, leading to higher corporate earnings, which in turn would justify higher share prices.
Bidenomics. The Dow Jones Industrial Average is up by 60% since Donald Trump has been president but Wall Street has found a reason to be cheerful about the arrival of his successor, Joe Biden. The victory by the Democrats in the byelections for Georgia’s two Senate seats means it will be easier for Biden to get a stimulus package through Congress. For now, bullish investors are ignoring the fact that Biden also pledged to toughen up regulation, which they tend to think is negative for the market, and are instead focusing on the boost they hope Bidenomics will give to growth.
What else is there? There are alternatives to investing in the stock market, such as cash and gold, but the low level of official interest rates and the depressing impact of QE on bond yields have made taking the risk of investing in equities more attractive. The Bank of England is currently weighing up the pros and cons of negative interest rates, which further tip the balance in favour of holding riskier assets with a higher potential yield, such as equities.
All of the above. The current mindset of the market is that there is now light at the end of the Covid-19 tunnel. Normal life is going to resume but inflation is not going to pick up, so central banks and finance ministries will be under no pressure to withdraw stimulus any time soon. In the event that share prices do take a tumble, the Fed will ride to the rescue.