RBA stimulus to fuel ‘raging bull market’ in ASX shares. Should you go all in?

Should investors be going all-in on ASX 200 shares after the RBA’s meeting this week? Perhaps, but there is a caveat to consider!

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ASX gold inflation gold bull figurine standing on stock price charts representing rising asx share price

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The S&P/ASX 200 Index (ASX: XJO) has been on fire this week. Since Monday, the ASX 200 has risen from 6,607 points to today’s 6,819 points (at the time of writing). That’s a hefty rise of more than 3.3%.

Since the index has lost 2.3% over the past year, this week’s rise is a significant one. If we have a couple more weeks like this week, we’ll be back at all-time highs in no time.

So why such a comprehensive jump?

Well, we can probably put it down to the actions of the Reserve Bank of Australia (RBA) this week. On Tuesday, the RBA surprised investors with a startlingly dovish update. The RBA told the markets that it would be doubling down on its quantitative easing (QE) programs, as well as all but promising interest rates will stay at 0.1% until 2024.

As RBA governor Dr Philip Lowe told us, the RBA is waiting for inflation to reach around 3% before he sees any changes to monetary policy. A 3% inflation rate would likely only come with a booming economy with full employment. Until then, we’re still stuck with ‘lower for longer’.

This announcement sent ASX shares into a frenzy. This is because low rates give ‘risk-on’ assets like ASX shares a massive boost, seeing as there are no real alternatives for generating yield in a zero-rate, QE-fuelled environment.

Raging bull… market

According to reporting in the Australian Financial Review (AFR) today, fund managers and economists are in agreement on this, with many commentators predicting “a raging bull market” in 2021 as a result.

The report quotes MST Marquee’s Hasan Tevfik as saying:

RBA stimulus increases the possibility of a raging bull market in equities. The extreme financial repression, which the RBA is trying to orchestrate, should be explosive for debt-financed M&A [mergers and acquisitions].

But the commentary isn’t all ultra-bullish. Some commentators are expecting that the RBA’s actions will fuel what they see as already-existing ‘bubbles’ in financial markets.

Here’s Mr Tevfik again:

We have all the ingredients for an asset bubble to form in housing… Cheap money, rebounding economy, strong consumer sentiment and job vacancies strongly rebounding. There is no bubble today, and the RBA is focused on investor credit growth in the housing market which is under control right now. In six months it could be a very different story…. We are also seeing all the signs of the beginning of an equity market bubble.

Hugh Dive of Atlas Funds Management agrees. He told the AFR that while there was no ASX-wide bubble, “there are pockets of what looks like a dangerous bubble, namely tech and buy now, pay later”.

So should ASX investors go all in?

Well, these commentators are suggesting that conditions remain very fertile for ASX shares in the short term, but they are also warning investors not to get too carried away. We are seeing some interesting signs of late of frenzied speculative behaviour, such as the GameStop Corp (NYSE: GME) saga last month.

It’s normally speculative behaviour that signals the ‘top is nigh’ for a bull market. But with the RBA still steering the ASX ship into uncharted monetary policy waters, who knows where we’ll end up on this one. Perhaps keeping a foot in both camps, with a solid ASX share portfolio as well as a strong cash buffer, is the best path to tread.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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