Much has been written on how the current stock market rally is one that is driven by retail investors against a backdrop of massive liquidity, the trillions of fiat money injected into economies from unprecedented fiscal and monetary stimulus measures to counter the effects of the Covid-19 pandemic.

Owing to the urgency of the situation, many of the aid measures implemented were blunt. While these measures were deemed necessary to mitigate the fallout by protecting productive capacities, jobs and livelihoods, a good portion of the money also found its way into financial assets, including stock markets. Hence, the strong and quick V-shaped recovery in stock prices around the world. We touched on this topic in our article last week.

Aside from the macro implications, liquidity is also an important factor behind individual share price movements and valuations. Empirical evidence shows that there is a positive correlation between trading liquidity and share prices.

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