What’s behind the boom?

Money is cheap and bond returns low, so the equity market is being flooded

’ll come right out and say it: This market has me baffled! If you’d said we would be in a world where unemployment has rocketed, economic growth rates are plunging and company earnings are due to collapse, AND that the stock market would be racing to take out the prior highs, I would have argued that you need mental observation.

And yet here we are.

The Nasdaq has led a huge V-shaped recovery in global equity markets and has surged to a record high. We’ve witnessed the fastest bear market and the speediest recovery in history. All in the space of just three months.

What’s behind this incredible rally in the stock market, and is it sustainable?

One has to acknowledge an important fact: interest rates are practically at zero all over the developed world. They are negative in some places. The cost of money is nothing. That’s a situation that looks likely to remain for years.

US Federal Reserve Chair Jerome Powell recently suggested that the Fed is “not even considering” raising interest rates any time soon, and is likely to leave them at the current level until 2022. So free money is guaranteed for the foreseeable future. What that also means is that there is simply no benefit to holding cash. Investor and entrepreneur Ray Dalio has been quoted as saying recently: “Cash is trash.”

Bond yields in the devel

Ioped world are at the lowest levels ever seen, so there is not much appeal to owning bonds in the current environment if you’re seeking a return on your invested capital. That brings us back to equities and the acronym that has been around for a few years now: TINA — there is no alternative.

In a world where every other asset class is guaranteed to give you zero return on your capital, equities are the only place with some potential for growth. Irrespective of whether valuations are stretched and earnings are under pressure, money is finding its way into the share market.

“Surely that is simply going to inflate a bubble in the equity market?” I hear you say. Yes. And, interestingly, that is something that is becoming more and more apparent now.

Prior to the market collapse in March, the 10-year equity bull market didn’t seem to have the euphoria that is typical at the mature stage of most bull markets. It is starting to become evident now, and may increase as the market rises.

Retail investors have been opening share trading accounts en masse recently. And there is a surge in the number of new IPO listings in the US. All of this seems to smack of building euphoria and mania.

Betting against the euphoric stage of a bull market can be costly, and knowing when an inflating bubble will pop is nearly impossible. Veteran investor Jim Rogers has said: “A