This week, several central banks around the developed world made the call to keep interest rates near rock bottom. This week, the Dow also broke through its all-time high. Coincidence? I think not, and many on Wall Street would agree.
As I mentioned last month, the world’s biggest central banks are engaged in a game of “Currency Limbo.” Basically, in order to prop up their home economies, these banks are keeping interest rates near record lows. We’re seeing this especially in the economies hardest-hit by the ongoing effects of the financial crisis (Japan, the U.S., the U.K. and the Euro Area). Meanwhile, the world’s fastest growing economies (China and India) are still seeing higher interest rates as their central banks rein in inflation:
Keeping interest rates near zero jump starts a cycle where the home currency declines and borrowing increases. Corporate America is certainly taking advantage of the low interest rates—companies are borrowing on the bond market to the tune of $2 trillion each year! U.S. companies are then deploying this cash to buy back stock, buy out the competition or hiking up their quarterly dividends.
Investors like to see all of these things happening, and with the average S&P 500 stock yielding more than the banks, there’s no question which is a better investment opportunity right now. So this is where much of the latest rally is coming from. And you can see much of the same around the world:
In those countries that are enjoying low interest rates, their stock indices have rallied significantly since the beginning of this year. You’ll see that Japan’s NIKKEI 225, the S&P 500 and the U.K.’s FTSE 100 have gained the most ground, while China’s CSI 300 and India’s SENSEX haven’t fared as well. The Euro Area, of course, remains a bit of a basket case as its members sort out their debt problems.
So the ultra-low interest rate environment clearly has whetted investors’ appetite for the stock market, so it has been a plus for savvy investors.