The world economy had only the worst year of the modern era and 2021 did not start even at the best start. However, the stock markets seem to be impervious to bad news, with the MSCI Global Index of Developed Market Shares 10% above its pre-crisis peak. There are several reasons why stock markets are so hot.
Central bank action. Under the leadership of the US Federal Reserve, central banks responded quickly to the market turmoil that accompanied the first wave of the coronavirus pandemic in February and March last year. Interest rates were reduced and money was introduced into the global economy through asset purchase programs known as quantitative easing. Equally important, the Fed gave the impression that it would not allow stock prices to fall on Wall Street.
Vaccine optimism. Stock markets tend to be influenced by the outlook for the future rather than the current state of the world, and are convinced that growth will increase sharply when mass vaccination programs allow governments to relax out-of-state regulations. The assumption is that from the spring onwards activity will increase, leading to higher corporate profits, which in turn would justify higher stock prices.
Doctorate. The Dow Jones industrial average has risen 60 percent since Donald Trump took office, but Wall Street has found a reason to be happy with the arrival of his successor, Joe Biden. The Democrats’ victory in the by-elections for the two seats in the Georgian Senate means it will be easier for Biden to get a stimulus package through Congress. For now, optimistic investors are unaware of the fact that Biden has also committed to stepping up regulation, which they tend to think is negative for the market, and instead focus on the impetus 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 the risk of investing in stocks more attractive. The Bank of England is currently weighing the pros and cons of negative interest rates, which further strengthens the balance in favor of maintaining riskier assets with higher potential returns, such as equities.
All the above. The current market mentality is that there is now light at the end of the Covid-19 tunnel. Normal life will continue, but inflation will not rise, so central banks and finance ministries will not be forced to withdraw incentives any time soon. Should stock prices fall, the Fed will lead to the bailout.