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Why Money Supply matters A LOT

If it can be summarised in 2 words why the strength of the US stock market is so strong and bullish since the Covid 19 pandemic lows in 2020, many will agree it is all about – Money Liquidity.

One of the best measures of money liquidity is called the M2, which refers to a measure of the money supply that includes cash, checking deposits, and easily convertible near money circulating the economy.

The chart below clearly shows the upward trend of the M2 supply since the Covid 19 pandemic started.

The chart below shows the price chart of the S&P 500 since 2020 to date. Did you notice how similar the trends are between the price action of the S&P 500 and the M2 supply?
While the S&P 500 appears to be very strong and tracks the M2 supply fairly well, not everything under the hood is fine and happy. Many investing in high growth stocks, small and mid cap stocks probably aren’t doing that well. For example the ARK Innovation fund, created by the famous high growth investor Cathie Wood, has not done well at all since the beginning of 2021.
What exactly is happening? Why aren’t all stocks behaving like it should be similar to how S&P 500 is tracking the M2? The answer is very simple. You just have to look at the M2 growth rate. Did you notice how the ARK Innovation fund peaked around the same time as the M2 growth rate peaked at the beginning of 2021?

Conclusion

In summary, there is a simple way to determine whether a Blue Chip can continue to rise – there must be a narrative for it to grow in the future.

Having a historical track record is useful, but not everything. The reason is because past performance is no guarantee of future performance.

However, the combination of historical quality track record + visionary upside narrative increases the likelihood a strong stock will only get stronger with time!

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About AlgoMerchant

AlgoMerchant is the first to empower stock investors with an artificial intelligent investing solution. We create intelligent trading algorithms by using our novel proprietary Machine Learning framework and BIG DATA processing capabilities. It employs quantitative models that utilize pattern recognition techniques to exploit market inefficiencies and generate non-correlated market returns, also known as ALPHA. The solution facilitates investors to manage their investment accounts like professionals, with no trading knowledge and complete simplicity. AlgoMerchant has a diverse team of traders, engineers and data scientists whose mission is to democratize data-driven and systematic investing. And now we are ready to serve every investors’ needs in their journey to trade.

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