Why Equity Rally Continues Despite Shakey Economic Fundamentals

Citigroup analyst shows central banks are helping drive the rally as U.S. shares climb to record highs

Investors have been bailing out of equity funds at a rapid clip. So how come stocks keep rising?

One Citigroup analyst may have the answer: It appears that, as regular investors flee, central banks have stepped into the breach.

Asset purchases by central banks have risen to their highest levels since 2013, suggesting that the rallies in equity and credit markets—which some say already appear stretched—could continue picking up steam, according to Matt King, a credit analyst at Citigroup.

He illustrates his points in the charts below:

Central-bank buying is closely correlated with equity gains:

Investors have pulled the equivalent of $133 billion from global equity funds so far this year, according to a weekly fund flows report from Bank of America Merrill Lynch released Friday. Of that nearly $80 billion has been pulled from U.S. equity funds.

But that hasn’t slowed the rally in U.S. stocks. Both the S&P 500 index SPX, +0.01% Dow Jones Industrial Average DJIA, +0.13% logged record closing highs Tuesday.

The data suggest the equity rally could continue regardless of the underlying economic fundamentals if central banks keep gobbling up stocks, King said.

“While we remain deeply skeptical of the durability of such a policy-induced rally…we suspect those with bearish longer-term inclinations may nevertheless feel now is not the time to position for them,” King said.

This report first appeared on Marketwatch.com

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