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What’s behind the rally in stock prices since mid-summer? It sure hasn’t been the global economic data or earnings outlook, which have continued to drift lower. The real impetus has been the fact that central banks almost everywhere have ‘opened the spigots’ of monetary easing fully, particularly in the U.S. and Europe. After providing major monetary stimulus to financial markets over the past four years, U.S. Federal Reserve Chairman, “Helicopter Ben” Bernanke has pulled out all the stops and gone to his most aggressive monetary stimulus program, referred to as QE3 (3rd round of quantitative easing), but which is really “Unlimited QE.” Stock markets have responded favourably with global stocks rallying sharply both on that news as well as the almost simultaneous moves by the ECB (European Central Bank) to engage in a similar program of buying bonds to push long-term interest rates lower and stimulate growth in the global economy. With the Fed’s announcement and the ECB declaration of unlimited bond purchases, we have entered a new phase of central bank intervention – perpetual easing. In a sense this is simply a return to a prezero-bound world – central bankers will step in with support when the economy slows. It used to be rate cuts, now it is asset purchases. However, there is now a clearly stated goal of pushing investors into risk assets. If the few years are any guide, regardless of the impact of this latest round of easing on the real economy, markets are likely to continue moving higher with leadership coming from cyclical, value and risk stocks.
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