Since the US elections, asset prices have risen steadily higher. Can the risk rally continue? I believe it can as it is underpinned by three powerful drivers. However, there are also three looming risks that could undermine it.
Three primary drivers of the rally
Refocus on the business cycle
It is tempting to attribute the rally to the outcome of the US elections. Personally, I think it has had less to do with the results of the elections than the mere fact that they have occurred, leaving the markets with one less thing to worry about. Leading up to the elections, investors had become so preoccupied with how different combinations of government would affect markets that they failed to notice that we are likely in the early stages of the next business cycle expansion.
Business cycle expansions are measured in years rather than months, and equities and credit tend to perform as the expansion unfolds. The passing of the elections left investors in search of a new narrative and, aided by good results from the vaccine manufacturers, their focus fell on the business cycle—and I believe this has been one of the drivers of the risk rally.