As markets continue to rally, questions are arising if today’s stock market is akin to the stock market rise in 1999. There are, of course, quite a few differences. In 1999, there were no earnings, only clicks — it was a widely followed metric — the more dot-com companies’ stocks went up, and so did the losses on their income statements. If the cash flows from an investment cannot justify the price, sooner or later, the game is over. Marijuana stocks today are showing similar characteristics but not the stock market as a whole. Corporate earnings still matter in 2020.
Another key difference is the Federal Reserve is unwinding its quantitative tightening at a rate of $100 billion per month in balance sheet growth and over $400 billion in total balance sheet growth since it made the infamous U-turn in monetary policy at the end of September 2019. This has increased money supply. The narrowest definition of the money supply — called the monetary base and designated as M0 — includes only currency in circulation and excess reserves. So, as money supply accelerates, it is providing much needed support for the continued rise of the stock market.
And so, stocks are not overbought. At least, not yet.
Future Wealth’s View
Economics 101 – An increase in the money supply will lead to a fall in interest rates. Lower interest rates increases investment and economic activity. This, in turn, increases consumer spending. And, the cycle continues upward toward economic growth. The risk, of course, is inflation. Economic growth increases wages that, in turn, increases the price of goods and ultimately leads to inflation.
As we have stated in previous articles, we believe the economy is in good hands with the current Fed Chairman. Having successfully prevented a recession last year, the dramatic shift in monetary policy to unwind the Fed’s balance sheet and increase economic activity has been a stroke of genius. Of course, the Fed Chair – Jay Powell, will not get any accolades until well after his tenure but the Fed’s actions in 2019 will go down as one of the seminal moments in America’s continued economic growth.
Books will be written about it. Let us pencil in those as ones to read in our comfortable retirement years.