Date
24 May 2017
Fund inflows from Europe triggered by the Brexit vote could be the driving force behind the recent US stock rally. Photo: AFP
Fund inflows from Europe triggered by the Brexit vote could be the driving force behind the recent US stock rally. Photo: AFP

What’s behind the recent strength of US stocks

The US stock market has done extremely well in recent months and it seems the rally has little correlation with monetary easing.

US equities have constantly set new highs after the Brexit vote.

Three US benchmarks — S&P 500, Dow Jones and NASDAQ — have hit fresh records.

In the past, the trend in the US market had a strong relationship with the Fed’s quantitative easing (QE) policy.

The Federal Reserve launched several rounds of QE after the 2008 financial crisis in a bid to bolster the stock market and stimulate economic growth.

The US stock market has since moved in tandem with the Fed’s QE action.

The Fed easing move supplied abundant market liquidity and suppressed interest rates to record-low levels, leading to a scramble for limited assets.

The Fed has unveiled three rounds of QE since late 2008, during which the S&P 500 index soared 38 percent, 11 percent and 40 percent, respectively.

By contrast, the S&P 500 typically trended downward most of the time in the absence of QE by as much as 10 percent.

But this time, things are different.

The index has gained more than 8 percent since November 3, 2014 when the Fed wound up QE3.

The reason may lie in the Brexit vote.

The surprising referendum outcome prompted the Bank of England and the European Central Bank to pump more liquidity into the market.

It also triggered massive capital outflows from Europe. As much as US$6 billion has been withdrawn from European equities in a single week, according to data provider EPFR.

The money has mainly flowed into the US and some emerging markets.

In fact, there is obvious sign of inflows into US equity ETFs post-Brexit.

In other words, this round of US equity rally has a lot to do with capital inflows from Europe triggered by the Brexit vote.

This article appeared in the Hong Kong Economic Journal on Aug. 10

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

RA

Hong Kong Economic Journal chief economist and strategist

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