Three months ago, I highlighted a raft of reasons why the V-shaped equity market recovery is based on sound fundamentals following the shortest bear market in history (‘Bull market rules’, 8 June 2020). That’s still the case, which is why the MSCI World All-Country index has risen by 7.8 per cent in the past 12 weeks and is making all-time highs, a reflection that the unprecedented quantitative easing (QE) programmes of the world’s major central banks, combined with huge government fiscal stimulus, is having the desired positive effect as investors’ position themselves for a strong economic recovery.
I also noted that technology and small-cap stocks were sending strong signals to investors by leading the charge, highlighting much improved risk appetite. They still are. In the US, the tech laden NASDAQ 100 index has surged 22 per cent in the past 12 weeks, outpacing the 8.2 per cent gain on the S&P 500 index. Both are making new all-time highs. The FTSE Aim All-Share, the index I trawl for under researched small-cap gems, has outperformed the FTSE 350 index by 16 per cent since early June, too, and is back in positive territory for the year.
These trends should not be surprising given that the primary aim of QE is to drive long-term bond yields lower, force investors up the risk curve in search of higher returns, relative to bonds, and create a positive wealth effect by boosting asset prices. In a zero-interest rate policy (Zirp) environment, equities are a major beneficiary, as was the case when the world’s central banks embarked on their money printing programmes following the Global Financial Crisis in 2008.