Stocks Market vs Global Liquidity: Post GFC Experience

Today, I’d like to take a deep dive into the fascinating world of global finance and explore how global liquidity has reshaped the stock market since the Global Financial Crisis (GFC). Over the past decade and a half, central banks around the world have been pumping money into the financial system, almost as if cash could grow on trees. 

This wave of liquidity has changed the way markets move, fueling long bull runs and altering the nature of bear markets. In this post, we’ll unpack what this “flood of money” really means, how it has transformed investor behavior, and why understanding liquidity has become essential to making sense of today’s financial landscape and what does that mean for bear markets, investor confidence, and the long game?

Liquidity: The Market’s Lifeblood

Let’s start with the basics. When we talk about liquidity in the context of global markets, we’re talking about the cash (or near-cash) that central banks like the US Federal Reserve (FED), European Central Bank (ECB ), Bank of Japan (BoJ) or even our own Monetary Authority of Singapore (MAS) pump into the financial system. Post-GFC, this became the go-to move to keep markets from imploding. 

The GFC in 2008 was a wake-up call. Markets tanked, banks froze, and panic spread faster than a wildfire . That forced Central banks to step in with unprecedented liquidity injections, huge quantitative easing (QE), asset purchases, and cheap loans to banks. The result? Bear markets, those dreaded periods when stocks are in free fall, didn’t last as long as they could have. Why? Because liquidity restores confidence, keeps markets functioning, and stops the whole system from grinding to a halt.

<Image credit:Bianco Research LLC>

How Liquidity Shortens Bear Markets

Preventing a Market Freeze

Picture this: it’s 2008, and the financial world is in chaos. Lehman Brothers collapses, and suddenly, nobody wants to touch risky assets. Market makers (those folks who keep the stock market humming by buying and selling), start backing away because they’re worried about their own balance sheets. This is what we call a liquidity spiral, where fear feeds on itself, and trading just stops. Prices plummet, volatility spikes, and it’s chaos.

Central banks swoop in like superheroes with their liquidity capes. By buying up assets (like government bonds or even corporate debt) or offering loans to financial institutions, they give market makers the cash they need to keep trading. This prevents the market from seizing up like a rusty engine. The 2008 interventions, like the Fed’s massive QE program, were a textbook example. They pumped money into the system, and slowly, the gears started turning again. Stocks didn’t just keep falling—they found a floor.

Mitigating Systemic Risk

Liquidity isn’t just about keeping traders in the game; it’s about stopping the domino effect. When a big player like Lehman goes down, it can drag everyone else with it. Central banks act like a global financial safety net, catching the system before it crashes. By ensuring major institutions don’t fail, they restore faith in the banking system and the broader economy. 

Take 2009, for instance. The Fed, ECB, and others didn’t just throw money at the problem; they signaled to the world, “We’ve got this.” Investor confidence, which was in the gutter, started to creep back. Without that safety net, the 2007–2009 bear market could’ve dragged on much longer, turning a bad situation into a global catastrophe.

Encouraging Risk-Taking

Here’s where it gets interesting. When central banks flood the system with money, interest rates drop to rock-bottom levels. Holding cash becomes like holding a cup of hot water left out in the sun. Investors, from hedge funds to your uncle who dabbles in stocks, start looking for better returns. Where do they go? Straight to riskier assets like crypto or meme / penny stocks.

This shift creates buying pressure and FOMO, which props up falling stock prices. It’s like a shot of adrenaline for the market. During the COVID-19 crash in March 2020, central banks didn’t just sit around—they unleashed a tidal wave of liquidity. The Fed slashed rates to near zero and rolled out massive asset purchases. Result? The market bounced back faster than you can see “circuit breaker.”

Central bank moves aren’t just about money; they’re about messaging. When the big players step in, it’s like a neon sign flashing, “Don’t panic, we’re here to save the day.” This was evident way back in 1998 when the Hong Kong government intervened to stabilize markets during the Asian Financial Crisis. That kind of clear, coordinated action sets expectations that funding will keep flowing, which boosts stock market liquidity. Investors start to believe the worst is over, and that confidence alone can shorten a bear market.

Let’s look at the receipts. The 2007–2009 bear market was brutal, with the S&P 500 dropping over 50%. But central bank interventions i.e QE, bailouts, and low rates helped stabilize things by mid-2009. Without that, we could’ve been looking at a decade-long slump. Fast forward to 2020, and the story repeats. The pandemic-induced crash saw markets tank in March, but massive liquidity injections globally turned things around by April. The bear market lasted barely a month, one of the shortest on record.

The Flip Side: Limitations of Liquidity

Now, before you think liquidity is some magic bullet, let’s talk about its limits. It’s not a cure-all, and it comes with some serious caveats.

Liquidity can put a Band-Aid on a bleeding market, but it can’t fix what’s broken underneath. If companies are posting lousy earnings or the economy is stuck in the mud, no amount of cash is going to make stocks soar forever. Think of it like giving coffee to someone who’s sleep-deprived, 😅it’ll keep them going for a bit, but eventually, they need to rest. The 2008 recovery took years because, despite all the liquidity, the real economy had to heal.

Risk of Moral Hazard

Here’s where things get dicey. When central banks keep bailing out markets, investors start acting like they’re untouchable. It’s called moral hazard—taking bigger risks because you know someone’s got your back. This can inflate asset bubbles, like we’ve seen in tech stocks or, more recently, the AI hype. When the bubble pops, the fallout can be worse because everyone’s over leveraged. 

Not every bear market responds to liquidity like a charm. Research shows that throwing money at the problem works better in a bull market than a bear one. Why? Because in a downturn, fear dominates, and investors might hoard cash instead of buying stocks. If the market’s mood is still sour, liquidity alone won’t turn things around. 

Central banks can pump money in fast, but unwinding those bloated balance sheets? That’s a slow, painful process. Keeping interest rates low for too long can mess with the financial system. Banks’ returns get squeezed, and long-term inflation expectations can shift, creating new risks. Look at the post-GFC era: central banks kept rates near zero for years, and while it propped up markets, it also fueled asset bubbles and left economies hooked on cheap money.

The AI Bull and Liquidity’s Role

Now, let’s bring this home to 2025. The AI bull market is the talk of the town, and liquidity is playing a starring role. No doubt, AI has brought real advancements—productivity gains, new tech, all that good stuff. But let’s be real: a chunk of the AI stock frenzy is pure speculation and companies are trading at sky-high multiples, and it’s not all because of their groundbreaking tech. 

<Image credit: Quantitative Perspective.Com>

The announcement of OpenAI deploying 6 gigawatts of AMD Instinct GPUs, coupled with warrants for a 10% stake, triggered a 27% surge in AMD’s stock, adding approximately $80 billion to its market cap in a single day. Similar dynamics are evident in Nvidia’s $100 billion investment in OpenAI and Oracle’s partnerships, creating a web of interconnected financial commitments that inflate valuations rapidly. This phenomenon, where market capitalization spikes without immediate revenue realization resembles a liquidity-driven bubble.

<Image credit:SoftBank Group>

The post-2008 Global Financial Crisis (GFC) era saw central banks inject trillions into the economy through quantitative easing, flooding markets with liquidity. Low interest rates and excess capital have fueled speculative investments, particularly in high-growth sectors like AI. The current AI frenzy mirrors the dot-com bubble, where valuations soared on hype rather than proven earnings. Remember that time a company's share price could double or triple just by adding "dot-com" in the company name. AMD’s projected $100 billion revenue over four years is speculative, hinging on future deployments and OpenAI’s success, yet it’s already priced into the stock. Such complicated investment announcement between these Ai giants has created hundreds of Billions of market capitalization increased within days, out of thin air.

<Image Credit:https://x.com/TrungTPhan/status/1975209544709202157?t=KN8HtzukOqp4jqQOQhgskA&s=19>

This liquidity surplus, combined with FOMO (fear of missing out) among investors, amplifies the bubble risk. Historical bubbles, like the 1990s dot-com crash, show that when fundamentals lag hype, corrections can be severe. While AI’s long-term potential is undeniable, the current pace of valuation growth—disconnected from tangible earnings—signals a bubble stage. Central banks’ continued accommodative policies could sustain this until a trigger (e.g., rate hikes or project delays) punctures it, potentially echoing the GFC’s systemic fallout. Investors should tread cautiously, balancing AI’s promise with prudent risk assessment.

"It’s liquidity, stupid!" , allow me to borrow the phrase coined by James Carville " The economy , stupid" , a strategist who successfully help Bill Clinton won the presidential election in 1992.

Musical Chairs 

The global financial crisis (GFC) of 2008 prompted central banks worldwide to inject unprecedented liquidity into the economy to stabilize markets, a trend that persisted in the aftermath. This excess liquidity, initially aimed at supporting equity markets, created a ripple effect as money flowed into various asset classes, including cryptocurrencies and money market funds (MMFs). The chart illustrates how top U.S. asset managers have driven MMFs to a record $7.7 trillion by August 2025, with a 13.7% CAGR since 2018-2019, reflecting a significant shift in capital allocation post-COVID-19. This movement of funds, spurred by low interest rates and quantitative easing, has fueled volatility across markets. 

As investors chased higher yields, money rotated from equities to riskier assets like crypto during bull runs, only to retreat to safer MMFs during uncertainty, as seen in the dip around the 2020 pandemic. This dynamic has amplified market swings, with firms like Fidelity ($1,641 billion) and J.P. Morgan ($812 billion) capitalizing on the trend, highlighting how excess liquidity continues to reshape investment landscapes.

<Image credit:Econvis.net, Office of Financial Research>

Central banks, especially post-2020, have kept the money printer going. Low rates, big balance sheets, and a global economy still recovering from the pandemic have created a perfect storm for risk-taking. Investors are piling into AI stocks, chasing the next big thing. It’s a party, and everyone’s invited—until the music stops.

As John Maynard Keynes famously said, “The market can remain irrational longer than you can remain solvent.” The AI bull could keep running, fueled by liquidity, far longer than the skeptics expect. Central banks have shown they’re not afraid to keep the taps open, almost like they’re addicted to printing money. But when the party does end—and it will—those who overplayed their hand might be left holding the bag.

Stocks, Earnings, and the Long-Run Dance

In the long run, stock markets are like a mirror reflecting the health of companies and the broader economy. Strong corporate earnings and a robust economy are the backbone of rising share prices. When companies consistently grow their earnings per share (EPS), it signals efficiency, innovation, and demand for their products or services. This isn’t just hot air—higher EPS often translates to higher stock prices as investors reward profitability with confidence. A thriving economy, with low unemployment and steady GDP growth, creates a fertile ground for businesses to flourish, further boosting earnings and, by extension, stock valuations.

<Image credit: Goldman Sachs Global Inv Research>

However, the market isn’t a straight line. Short-term noise,be it liquidity surges or speculative frenzies, can distort the picture. Over time, though, fundamentals win. Companies with solid balance sheets and growing EPS tend to see their share prices climb steadily, assuming no major disruptions. A perfect economy, while rare, amplifies this trend, creating a virtuous cycle of investment and growth. But beware: overvaluation or economic hiccups can still derail the party, so keep your eyes on those earnings reports!

Final Thoughts

So, where does this leave us? Liquidity has been a game-changer since the GFC, shortening bear markets and keeping the financial system from collapsing. It’s like the "chili padi" in your laksa, small but powerful, giving the market the kick it needs to keep going. But it’s not perfect. It can’t fix broken fundamentals, it breeds moral hazard, and it’s less effective when fear rules the day. Plus, the long-term risks of bloated balance sheets are real.

Moving forward, excess liquidity will likely fuel market volatility, with stocks swinging wildly as cheap money inflates bubbles and triggers sharp corrections. Central banks’ relentless cash injections can pump up valuations beyond fundamentals, creating euphoric highs followed by brutal drops when sentiment shifts. For long-term investors, this is a golden opportunity. Stay disciplined,focus on quality companies with strong EPS growth and solid balance sheets. Use volatility to your advantage: buy undervalued gems during dips and hold for the long haul. Diversify to cushion swings, and ignore short-term noise. Patience and fundamentals will turn liquidity-driven chaos into wealth-building wins.

As for the AI bull, enjoy the ride and party while it lasts , but don’t get too drunk on the liquidity punch. The Central banks might keep the party going, and the markets can stay irrational longer than your portfolio can stay solvent. But as a long term investors looking for value, we need to stay sharp, keep an eye on the fundamentals, and maybe don’t bet your entire portfolio on that shiny AI stocks only , be diversified and avoid putting all your financial eggs in one basket.

Cheers! Till next time.😊

STE 

P.S 

This a very good YT video from Prof. Aswath Damodaran on current "Stock Market Valuation"... enjoy watching!