How to sustain a bull market
If you want to cook up a bull market, you only need a few ingredients. Surprisingly, inflation and global growth are not required to get a rise out of this loaf. Instead, all you need is an accommodating Central Bank to circulate a record amount of cash along with a clear motivation to buy stocks.
Cash is a key component for buying stocks in our ultra-low interest rate environment. This wasn’t the case historically when interest rates were higher; too much cash slowed growth and stagflated economies. The major difference here is that the biggest, US companies are sitting on record amounts of cash with nowhere to put it except for buying up their own stock. Warren Buffett’s Berkshire Hathaway group is sitting on more than $100B of cash and recently admitted to reinvesting it in its own stock. This isn’t new investment that contributes to economic growth, but it does provide for a generous boost to stocks in the S&P 500.
The S&P 500 is up 23% since the December low, a surprising reversal from what many thought to be the start of an overdue correction. International markets only partially recovered over the same time. The iShares MSCI EAFE ETF “EFA” returned 15% and the iShares Emerging Markets ETF “EEM” returned even less, 11.6%, which is more comprised of China region stocks.
As long as rates remain low, there’s sufficient reason to expect a continued rise in US large company stocks over the intermediate term. International markets, including China, will face increasing difficulty as the US imposes enormous trade restrictions effective in a couple weeks time; China may face economic contraction.
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