Aug 23, 2024 Equities

No more tailwind from money supply

For a year now, equity markets have been running ahead of the money supply. You can look at it one way or another, but stocks have one less stimulus to benefit from.

The brief summer storm in markets at the beginning of August couldn’t spoil equity investors’ mood. Not only have the losses been recouped, but the MSCI World Index is on the verge of regaining its historic high of mid-July. That is, if U.S. Federal Reserve (Fed) Chair Jerome Powell does not destroy the market's interest-rate-cut fantasies in his speech today in Jackson Hole. The market reaction in early August should be a good reason for him to refrain from overstimulating the market, however. As a matter of fact, the speed with which the market has priced in immediate help from the Fed in the form of faster rate cuts may cause him concern.

At the same time, the stock markets no longer seem to be as dependent on cheap and virtually unlimited money as they were until recently. On the one hand, they are reaching new heights despite the dramatic interest-rate increases of recent years. And on the other hand, as our Chart of the Week shows, the stock markets have also decoupled from the money supply. Of course, one should always be careful when attributing (equity-) market developments to individual factors, as markets react to a vast number of variables. Nevertheless, a certain synchronization of the two variables over the past ten years cannot be denied.

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Global equities outpace money supply

*Combined M2 money supply of U.S., Eurozone, UK and Japan

Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 8/20/24

As things stand, we don’t expect the money supply of the four major central banks (U.S., Eurozone, UK, Japan) to expand significantly in the coming years but rather expect it to grow in line with the economy at the most. In the short term, the subdued demand for credit suggests even less stimulus. The stock markets are therefore likely to receive less tailwind from the money supply than they have recently. In this respect, the equity markets will need other drivers to keep them on their upward trajectory. The Artificial-Intelligence fantasy alone may not be able to do the trick and could slowly run out of steam, and we do not expect any major leaps in economic growth in 2024 and 2025 either. Given fewer drivers going forward, we expect stock-market gains to be modest.  

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