Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stock Market Will Crash When Central Banks Stop Printing

Stock-Markets / Financial Crash May 03, 2013 - 12:10 PM GMT

By: DailyGainsLetter

Stock-Markets

Moe Zulfiqar writes: As central banks around the world have taken money printing and easy monetary policy, such as low interest rates, as their key tools to boost economic growth, there are concerns among investors about what happens once they actually stop and bring their monetary policy back towards normalization—raising interest rates and no longer printing money like they are doing now.


For example, the Federal Reserve is printing $85.0 billion a month, and its balance sheet has already ballooned more than $3.0 trillion after the financial crisis brought the U.S. financial system to near collapse. On top of all this, the Fed is also keeping interest rates near zero. Similarly, the Bank of Japan is taking the same measures and plans to increase its money supply extensively.

Looking at all this; there is a notion among investors that the stock markets are currently going higher because the central banks are printing money—not because of real reasons, such as earnings growth. When the economy is flooded with money, it usually has to find a home; the money is flowing into the stock market. Once they start normalizing their monetary policy, the stock market may come crashing down.

This opens the floor to debate; does money supply actually dictate the direction of the stock market? Please look at the chart below:


Chart courtesy of www.StockCharts.com

The chart above consists of the U.S. M2 money supply and the S&P 500.

Before going into further details, readers should know that the M2 money supply is a broad measure of money in an economy. In addition to currency in circulation (coins and notes), M2 also includes the amount of money in savings accounts and other related accounts. This measure of money is used by economists to get a more precise idea of the money supply in a country.

Go back to the chart above; looking at the overall picture, it indicates that as the money supply has increased (red line), the stock market/S&P 500 (green line) has followed the same direction. Just by observing this phenomenon, is this enough reason to believe the stock market will head lower once the central banks stop printing money and raise interest rates?

After paying close attention, you will notice that from the beginning of 1984 to 2000, the M2 and the S&P 500 moved in a similar direction. They both trended higher, but after 2000, things changed; as the money supply continued to increase, the S&P 500 didn’t trend higher, contrary to what investors believe. It traded sideways instead.

Saying rigorous printing and low interest rates were the only cause of the rise in the stock market may be faulty, but this by no means suggests that they didn’t have any implications on the stock market at all. Consider this: if the money printing continues, the value of the currency declines, causing the asset prices to rise.

There are many factors that affect the stock market other than just money supply. Looking at the performance of the S&P 500; the main reason for the rise in the stock market may be because economic conditions are much better than they were during the financial crisis: the unemployment rate is much lower, Americans are spending, and the financial system is in much better shape than before.

Source: http://www.dailygainsletter.com/stock-market/...

Copyright © 2013 Daily Gains Letter – All Rights Reserved

Bio: The Daily Gains Letter provides independent and unbiased research. Our goal at the Daily Gains Letter is to provide our readership with personal wealth guidance, money management and investment strategies to help our readers make more money from their investments.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in