Earlier today, I wrote about the remarkable comeback in share prices since the stock market crash of March 2020. Since then, the S&P 500 has almost doubled in value (up 94.5%). Meanwhile, the UK’s FTSE 100 has leapt by 43.4% since its 2020 low. But with stocks having surged so strongly, is now is a bad time to buy shares? Not necessarily, because powerful underlying forces keep driving markets to new heights. I wrote about four key market forces earlier. Here are another three that could propel stocks even higher.
Household wealth reaches record heights
Despite the worst pandemic in 100 years and the deepest recession since the 1930s, stock markets have rebounded hard. Also, many consumers — confined to working from home — have saved huge sums as their expenses plunged. Driven by these extra savings and rising share prices, global household wealth has exploded. Indeed, according to a Credit Suisse report, it surged by $28.7trn (£20.7trn) in 2020. In addition, another 5.2m people became dollar millionaires last year. Higher share prices and record property values were the key drivers behind this wealth uplift. Hence, global wealth reached $418.3trn (more than £302trn) in 2020. A significant proportion of this new-found wealth could go into stocks, helping to support and even drive up valuations.
Record inflows into equity funds
According to today’s Financial Times, record-breaking sums have flowed into stocks and shares in the first half of this year. In fact, 2021’s inflows are so large that, if sustained in the second half, they would exceed total global inflows into equity funds for the past 20 years combined. In H1, around $580bn (almost £419bn) has flowed into equity funds globally. With such a tall wall of money flowing into stocks, no wonder share prices keep on rising. After all, money drives markets — and the more money, the more powerful the push. But the danger with such crowded trades is that, when inflows dry up, values can quickly go into reverse. For inflows to keep driving up stocks, they need to be sustained at currently elevated levels.
TINA drives up share prices
Right now, TINA seems to be shareholders’ best friend. But who is TINA? TINA stands for ‘There Is No Alternative’. This is a widely held view among investors that, given tiny cash interest rates and low bond yields, buying shares seems to be the best option nowadays. With bonds enjoying a 40-year bull market, yields have collapsed to a fraction of former highs. As a result, 10-year UK Gilts offer a coupon of 0.723% a year, while 10-year US Treasury bonds pay 1.43% a year. With bond yields so low, my family portfolio owns no bonds — largely because company dividend yields look far more attractive to me. And with overwhelming liquidity sloshing around, ever-more money pouring into stocks keeps share prices high and rising.
One final warning: as veteran gamblers will admit, all winning streaks must come to an end. As I witnessed in October 1987, 2000-03, 2007-09 and in 2020, red-hot bull markets eventually crumble. Just as trees don’t grow to the sky, share prices can’t — and won’t — keep rising indefinitely. Nevertheless, with FTSE 100 value stocks still looking undervalued to me, I will keep buying cheap UK shares for now!
