Duurzaamheid

The development of money supply and stock markets has historically been closely linked. Thus, money supplies can serve as a leading indicator for movements on the stock markets. It can often be observed that share prices follow the money supply. Thus, in addition to fundamental analysis, the comparison between the development of the money supply and the stock markets can be an important tool for assessing the current situation on the stock markets.

What is the money supply?

The money supply is all the money that is available at any time to non-banks such as private individuals and companies. The money supply includes both cash and money in bank accounts. Cash held by banks, on the other hand, is not included. Only means of payment are recorded.

The money supply is divided into four levels: M0 (central bank money), M1, M2 and M3. For our consideration, the money supply M1 and M2 are particularly relevant:

•     Money supply M1: It comprises cash outside the banking system and overnight deposits (e.g. in current accounts or call money).
•     Money supply M2: It includes M1 as well as deposits with an agreed maturity of up to two years and deposits with a notice period of up to three months.

The similar development of money supply and stock markets could be followed particularly well with the M1 money supply in the USA and the S&P 500 stock index until April 2020. While the M1 money supply rose by almost 200 percent from 2008 to the end of April 2020, the S&P recorded a plus of 223.60 percent - a small difference of a good 10 percent.

Very easy to see is the setback that the S&P 500 made in March 2020 as a result of the outbreak of the Corona virus. Whereas in January it had been at 3,228.50 ( 261.13 per cent compared to 2008), in March it was only 2,574.50 ( 187.98 per cent compared to 2008). The M1 money supply, on the other hand, made a leap upwards in March. It rose from around USD 4.0 trillion to USD 4.26 trillion.

As early as April 2020, the S&P 500 then rallied strongly again in login exness. In doing so, it followed the development of the money supply or liquidity with a short delay. This movement has continued until today. From this point of view (comparison to the M1 money supply), the highs of the S&P 500 are justified and understandable despite the Corona pandemic.

Note: The approximate quadrupling of the money supply from April to May 2020 is based on a change in the basis of calculation. From May 2020, the M1 money supply also includes savings deposits (including money market deposit accounts).

    own calculation

The increase in the US M2 money supply from 2008 to 2020 is less pronounced than for the M1 money supply. In April 2020 it is nevertheless considerable at 108.06 percent. Here, too, the jump due to the Fed's measures in the context of the Corona pandemic at the end of March can be seen. This development was followed by the S&P 500.

Conclusion

The importance of the money supply for the stock markets is often underestimated. Even if the highs of the stock markets in the midst of the Corona pandemic seem strange, ultimately the stock markets also follow the development of the money supply and thus liquidity during this period.