Stock markets post best results in decades amid signs of interest rate cuts

Traders at work at the New York Stock Exchange. Photo / Getty Images

Global stock markets will record their best first half performance in more than two decades, as central banks signal a new wave of stimulus to prop up stuttering economies.

More than £5 billion ($9.6b) has been added to the value of shares this year on growing expectations that the Federal Reserve and European Central Bank will start cutting interest rates to tackle the global slowdown.

The MSCI World Index has gained 16 per cent in 2019, its strongest first half since 1998 just before the dot-com bubble burst.

Growth worries have mounted on markets amid signs that the economic malaise gripping China and the eurozone has spread to the US.

The latest leg of the stocks rally has been fuelled by the Fed moving towards its first rate cut in a decade after US-China trade tensions escalated. US markets hit a record high this week after the Fed vowed on Wednesday to "act as appropriate" to keep the economy growing.

Although central bank stimulus could extend an ageing economic cycle, analysts believe a longer expansion could come at a cost.

Economists at Deutsche Bank have warned that attempts to prevent recessions have made the economy more vulnerable to full-blown financial crises as the US closes in on its longest ever unbroken run of growth.

Deutsche's Jim Reid explained that the longer economic cycles enjoyed since the 1980s have come at the cost of "increasing debt, more money printing, and increasing financial market instability".

Policymakers have created a "financial system that is prone to crises" and "an environment where recessions are a global systemic risk", he warned.

"As such, the authorities have become even more encouraged to prevent them."

More regular recessions could in fact strengthen the economy as they act as a "natural cleansing mechanism", weeding out inefficiencies in the economy, such as zombie companies.

The US economic cycle will be the longest on record from next month but the decade-long expansion has been fuelled by ultra-low interest rates for longer and huge rounds of quantitative easing, also known as money printing. Many fear that central banks have not restocked their war chests ahead of the next downturn after failing to normalise monetary policy following a slow post-financial crisis recovery.