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Central banks have become equities' best friend

U.S. Federal Reserve Chairman Ben Bernanke testifies before the House Budget committee hearing on the state of the Economy on Capitol Hill in Washington, in this February 2, 2012 file photograph.

YURI GRIPAS/REUTERS

After a five-month hot streak in equity markets (the S&P 500 is up 24 per cent from its October lows, the S&P/TSX composite up 12 per cent), it's no big surprise that most market strategists think much of the upside in stocks has evaporated. But that doesn't mean we're doomed to change course and head downward.

Not as long as the world's central banks are all playing along, anyway.

"The strong rally in stocks in the last few months means that the undervaluation in stocks has largely been erased," BCA Research Inc., a respected global financial-market research firm based in Montreal, said in an investment-strategy note Monday.

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However, it said the rally "will carry on further than most anticipate" - and it's because the world's central banks are now almost uniformly tilted toward accommodative monetary policy.

"This year a change is underway: There is hardly any central bank that is still in tightening mode. Instead, the leading central banks such as the ECB [European Central Bank] the Bank of Japan and the People's Bank of China are leading a new reflation cycle," BCA wrote.

"Expansive monetary policy almost always eases equity multiple compression, allowing stock prices to rise," it said.

"Further price gains may be harder to come by, but it is premature to anticipate another stumble," the firm said.

"With virtually all central banks in easing mode, and in the absence of negative exogenous shocks, the tendency will be for stock prices to rise."

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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