The overwhelming availability of cash could be one reason for the stock market’s puzzling strength in the face of fears over the economy, contends an article in Barron’s. The S&P 500 is now up roughly 14% after hitting a low of more than 20% last October, although it would still need to climb 18% to reach its January 2022 peak.
Investing in the stock market can be challenging, but you don’t have to do it alone. With Validea, you can access powerful stock analysis tools and learn from the investment strategies of legendary investors like Warren Buffett and Peter Lynch.
Discover how Validea can help you make smarter investment decisions [7-Day Free Trial]
Though some point to the belief that the Fed is going to end their rate hiking cycle and begin cutting as a reason for the resilience, the market’s gains feel overblown to others. With the S&P 500 trading at roughly 18 times forward earnings, that amounts to a 5.6% earnings yield—just 2 percentage points over the yield on 10-year Treasurys. That isn’t a lot, especially since the S&P 500’s expected return over bonds is usually around 4 percentage points. In addition, expectations that the Fed will start cutting and the economy will rebound may simply be overconfidence, the article posits. Given all of that uncertainty, the market’s recent gains are puzzling.
But the expansion of the money supply globally, which has gone up more than 8% to $87.3 trillion since October, could be a large factor in why stock prices are being pushed higher. And while the Fed has been gradually reducing the money supply in the U.S., China’s M2 has gone up more than $5 trillion, as has Japan’s, which is up over $9 trillion as the Bank of Japan has begun easing their monetary policy. All of that cash is heightening liquidity in the financial system around the world, increasing demand for S&P 500 stocks in particular, which are considered high-quality companies and have worldwide appeal. Indeed, research from Morgan Stanley displays a close correlation between the S&P 500 and liquidity; the more cash, the higher the S&P 500 goes. But the reverse is also true: if liquidity goes down, so do stocks. So even in this strong economy, nothing is certain.