December 16, 2020
There is much ado lately about the precipitous rise in the stock market compared to the real-life struggles happening on Main Street. It seems like every conversation about the stock market involves a strange equal-part mixture of relief, fear and confusion. And, inevitably with these mixed signals, most often what comes next are random opinions that are some amalgamation of political beliefs, favorite stocks and Coronavirus conspiracies.
Well enough of that.
Here's is some simple research that we put together using data from the Federal Reserve Economic Data center. Let's turn off the Mad Money and Varney & Co. and dig into some numbers that matter.
In this chart I have compared the rate of change in the monetary supply (M1) compared to the S&P 500 over the last 10 years. I think you can see the correlation. Not only can we see a historical correlation, but it gives us an eye-opening perspective on our current position, which doesn’t yet include another stimulus. This chart has indexed their rate of change to start at 100 at the beginning of 2011. That is to say, the money supply has increased over 350% while the S&P has increased nearly 300%.
What is critical to understand is that Federal Reserve and their monetary injections make them a player in the stock market. They are such, because they actively participate in the markets buying debt, both public and private.
In such an environment the stock market tends to reflect the future projection of the real economy PLUS the monetary support of the Federal Government. To be exact, $3.09 trillion dollars this year or about 15% of GDP. No small amount.
The reason for such a correlation is the money ends up funneled directly to the financial market as it first flows out through the major investment banks on Wall Street, and then to a lesser extent into the coffers of our largest companies (which comprise the stock market) who reap the majority of the new money in the real economy.
Now that interest rates are at 0%, central banks have only monetary stimulus to support the markets. The downstream problem is that the larger the role the play, the more attached our markets become to them. In other words, the power to create is also the power to destroy. And, therein lies the problem. Too much power is moving out of the private markets and being funneled into the government’s hands. That folks, is not how capitalism works and it is not how is will succeed.
The fact of the matter remains however… they wield a tremendous amount of influence of this stock market. The show could go on for a long time, or maybe not so long. But don’t underestimate their influence. It is the first place to look.
