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ASX 200 hits 8-month high. Here’s why we could go higher from here

asx shares volatility represented by illustration of business man on boat at the top of a wave
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Yesterday, the S&P/ASX 200 Index (ASX: XJO) hit a new 8-month high, closing at 6,298 points after going as high as 6,301 points during the trading day. It’s the highest level ASX 200 shares have been at since early March. And that was when the ASX 200 was in the midst of a coronavirus-induced freefall.

Blue chip shares like BHP Group Ltd (ASX: BHP), CSL Limited (ASX: CSL) and Fortescue Metals Group Limited (ASX: FMG) helped this happen with huge swings upward. Other ASX 200 shares like REA Group Ltd (ASX: REA) and Domain Holdings Australia Ltd (ASX: DHG) also hit new all-time highs yesterday, pushing the index higher. That follows the ASX 200 having one of its best weeks of the year last week, which saw the index surge by more than 4%.

So whilst these developments are no doubt pleasing for any investor holding ASX shares, there are a few reasons we could see it go higher from here.

Why the ASX 200 could push to new highs

The first is interest rates. Last week, the Reserve Bank of Australia (RBA) slashed the cash rate yet again to yet another all-time low of 0.1% (down from 0.25%). Conventional economic theory tells us that interest rates are directly correlated to higher share prices. That’s because they lower the attractiveness of ‘safer’ investments like cash and fixed-interest assets compared with ASX shares, while simultaneously increasing the availability of credit.

This view is expressed by asset manager Fidelity’s Anthony Doyle, as quoted by the Australian Financial Review (AFR):

In an environment of historic-low bond yields and ultra-easy monetary policy, investors are being encouraged into riskier asset classes to reach for returns…International experience with quantitative easing suggests that the appetite for riskier financial assets will be maintained. This will likely support Australian equity valuations…

Second, the US election last week has produced an outcome that investors have found very favourable. Separate reporting in the AFR quotes Hamish Douglass of Magellan Financial Group Ltd (ASX: MFG), who stated that the outcome from the election represents ‘nirvana’ for investors due to a Democratic president combined with divided party control of congress. The AFR quoted Mr. Douglass as stating “almost the perfect outcome from an investment perspective has been the outcome of this election”.

So we have interest rates at new lows, encouraging borrowing and discouraging alternative investments to ASX shares. Combine that with an outcome from the US election that a top ASX fundie has described as ‘nirvana’ for investors. No wonder the ASX is pushing higher.

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Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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