The Economist sums the melt up best:
It is tempting to attribute the strength of the Dow to optimism about the American economy. Tempting, but wrong. Studies have shown almost no correlation between GDP growth and equity returns. Indeed, the Shanghai stockmarket trades at less than half its 2007 peak, even though the Chinese economy has performed much more strongly than that of America since then. As the chart shows, this rally in the Dow has been accompanied by the weakest GDP growth of all the bull markets since the second world war.
The main factors behind the current surge seem to be twofold. The first is a degree of confidence that some “tail risks” have been avoided, at least for now. The euro zone has not broken up and politicians in Washington, DC have not brought the entire economy to a halt over tax-and-spending policies. Hurdles remain (such as raising the debt ceiling) but investors assume a deal will be done.
The second factor is that equities look better than the alternatives. Cash yields are puny and central banks have made it clear that interest rates will not rise for a while. Ten-year government bonds in much of the rich world yield 2% or less. Although there is no sign of the much-heralded “great rotation” out of bonds and into equities (see Buttonwood), there are signs that investors are putting cash in both asset classes following a long period in which equity funds suffered withdrawals.
(click here if chart is not observable)
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