When the supply of money expands – it’s typically very good for stocks. For example, the S&P 500 index is said to appreciate at an average annualized pace of 14.02% when liquidity expands. However, when it contracts, that gain was only around 7.0%. Today money supply is once again expanding after one of the largest contractions in recent history. This has the potential to be very good for investors. As they say, it’s always easier swimming with the tide.
Where Do We Go From Here?
Major averages pulled back this week on fears rates could remain higher for longer. Makes sense – with the US 10-year above 4.25% – that’s a reasonable assumption. But here’s the thing: get used to it. Whilst rates might feel ‘tighter’… rates are still not historically high. Not even close. What was not normal was rates being artificially suppressed to near zero for 15 years. And that might prove to be a difficult adjustment for some people. So where to from here? The honest answer is none of us know. What follows are some of the assumptions being made; and perhaps gaps in the market’s thinking… it starts by asking quality questions.
Excess Liquidity Still Present
Many people seem puzzled as to why the market continues to trade higher. For example, some readers have told me they missed the rally – wondering why things have not completely unravelled sooner. They’ve chosen to sit things out for one reason or another. And that makes sense… I’m sure they are not alone. Why are markets defying gravity? And how long could it continue? The short answer for a while yet. And the driver is liquidity.
For a full list of posts from 2017…