A fellow trader on Tradingview turned me on to the idea of tracking the US money supply and its effect on the S&P 500 and let me tell you, was this an all consuming rabbit hole or what!
In this post, I will look at the relationship between the US money supply and the S&P. Well, that was what it was supposed to be. It then turned into a look at how global money supplies affect indices in general because it is a really interesting rabbit hole indeed. So let’s get into it.
Does Money Supply Affect the Stock Market?
The general consensus that I could find in economic research and reports is that, in general, the US money supply and, more generally, global money supplies influence stock markets indirectly. The most obvious way is, money supply is needed to fund global investments in markets. Without money, there would be no way to invest. But there are also some indirect ways that money supply (MS) can influence the stock market. The most notable way is by creating liquidity and influencing behaviour. This is probably the most fresh example as it was arguably one of the biggest fuels on the post-COVID recovery bull run we had. The Federal reserve enacted monetary policy that made borrowing attractive and promoted investment, borrowing and leveraging (which took advantage of very low interest rates).
If we take a look at the chart above, this chart depicts the US money supply against SPX. The data is standardized in Z-Score format to be able to do side by side, direct comparisons. We can see that immediately following the COVID crash, the US money supply began rapidly increasing. This was the result of federal reserve policy aimed at quantitative easing. This was arguably one of the leading causes to the unprecedented growth of the S&P in such a short timeframe.
How has the US Money Supply Affected the S&P 500?
If we zoom out on the above chart and look at the US money Supply since 1959 overlayed against the S&P, we can see, visually, how the US money supply has impacted the S&P 500:
The first thing of note is there is a high degree of correlation between SPX and the US Money Supply, which has a Pearson correlation of 0.98. This is a strong, positive correlation. This means that as the US Money Supply increases, so too should the S&P and vice versa.
We can also see that, for the most part, the S&P’s growth is comparable to the US money supply. As the Money Supply increases, the S&P grows to match this supply. The exception to this was a stint of time between 19843 and 2002 where the S&P outpaced the US Money Supply:
The dotcom crash ultimately led to the S&P correcting back below the US Money supply, where it then recovered to catch back up to the US money supply, and the money supply actually became resistance in 2007.
We then again outpaced the money supply in 2018. This likely could have been a cause to the 2018 correction, which actually brought the S&P back down in line with the current supply at that time:
We then outpaced the money supply again in 2021, which was corrected during the 2022 bear market. However, we have ,yet again, in 2023, surpassed the current monetary supply:
Calculating Money Supply & SPX Price
The relationship between the monetary supply and the S&P is so strong, we can actually calculate the expected range of the SPX based on the current monetary supply. We can also reverse this and calculate what the monetary supply should be to support the current price of SPX.
To calculate the expected range of SPX based on the money supply, we would use this formula:
SPX price = US Money Supply x 1.918^-10 – 114.426
This would calculate what the price of SPX should be within +/- 228 points.
To calculate the needed money supply to support the price of SPX we would use this formula:
Money supply needed = SPX price x 4970424901 + 8.204^11
This would calculate the money supply needed to match the SPX.
So let’s do these calculations.
As of August, the current US Money Supply is 20.903 Trillion. So we substitute:
SPX Price = 20.903 Trillion * 1.918^-10 – 114.426
SPX Price = 3895.01 +/- 228
So the range that SPX should be in based on the money supply is between 4,123 and 3,667.
What about our monetary supply? What should that be to support the current price of SPX?
Well, let’s do the calculations. As of Friday August 25th, SPX closed at 4,405.
Monetary supply needed = 4,405 x 4970424901 + 8.204^11
Monetary supply needed = 23.63 Trillion
So the SPX should be at ~23.63 Trillion in order to support the current price of SPX. That is roughly a 13% increase from where we currently are.
How does an Index surpass Monetary Supply?
This is a great a question and one that I am not qualified or knowledgeable to answer very in-depth. But one way in which the SPX can sustain itself at levels above the current domestic monetary supply is through foreign investment. Indices and stocks are traded internationally and are not dependent on their own domestic currency alone.
Where this gets interesting is if we start looking at global monetary supply. Now, there are no tickers or indices that look specifically at global monetary supply, but what we can do is take the monetary supply of a few nations that have a high degree of international trade and compare the monetary supply among those countries.
You will notice the strong degree of correlation between all the nations in this table. (Keep in mind, these nations were randomly picked based on extent of their involvement with international and U.S. based trade.) If we were to standardize the data into Z-Score format (where we are just looking at the standard deviation) and put it into a line graph, this is the result:
When we standardize data, the difference is very indiscernible. This is because, monetary supply naturally increases at a steady and controlled rate, as to keep inflation under control and create supply and demand.
How does the SPX’s Growth Compare to Global Monetary Supply?
In researching for this post, I was curious how SPX’s growth looked in relation to the global monetary supply. The reason being, the thesis is that SPX’s growth above monetary supply can only be supported by the global interconnectedness of nations and the ability of foreign investment to supplement domestic investment. To do this, I standardized SPX in the same way and overlayed it with the random sample of countries monetary supply. The results are displayed in Chart 1 below.
I found this particularly interesting. I wondered if perhaps this was an American thing where everyone is just simply flocking to US investments. So then I thought to plot out some other indices, namely the TSX (Canada), NIFTY (India), DAX (Germany), and FTSE (U.K.). The results are listed in Chart 2 below.
Well, colour me shook. For the longest time it was actually the DAX and TSX that were just growing beyond the average monetary supply. Who would’ve thought? However, in 2019, SPX began exponentially growing, where it currently sits at approximately 0.7 standard deviations above the average monetary supply.
So what does it all mean?
So the logical question is what does it all mean and how does it help me? And unfortunately, this is a question more for an economist than for me. But I and you yourself can speculate by looking at all the data.
If we turn back to our SPX chart overlayed with the US monetary supply and apply Tradingview’s Cycle lines, we can see that the SPX operates in cycles in relation to the monetary supply:
And using the Sine function:
Essentially, these things are cyclical. We can see the same type of cyclical behaviour when we compare the individual indices to the SPX directly:
All this means is that we should eventually correct back down to the monetary supply, during which time another index will outperform the SPX and take the lead. Then rinse and repeat.
My personal take away from this little research project is twofold.
First, diversification in foreign markets is a smart idea and provides somewhat of a hedge against putting all your eggs in one market and one economy.
Second, you should pay attention to where and when you are investing in relation to the current monetary supply.
If we look at the chart above, the most stable and healthy gains were achieved when SPX was below the monetary supply. Whenever it was trading above, it would frequently experience drops of, on average, 2 standard deviations back down to the monetary supply in a matter of months until eventually correcting with a bear run and then resuming a healthy bull run.
That doesn’t mean you need to wait for a crash or calamity before investing, but its good to pay attention to the extent that a stock may exceed the current money supply. If we look for example at NVDA:
This is not a place I would buy NVDA because this move is likely not sustainable. But if we look, for example, at a stock like Ford (
F):
You will see that it is in a much more enticing area for a potential long entry.
Final Thoughts:
Hopefully you found this interesting, I sure did! I want to just say, that I am not saying SPX is going to crash or that we will experience another bear market any time soon. The reality of the situation is SPX has a track record of spending years trading above current monetary supply before correcting. Therefore, its not really realistic to expect SPX to suddenly come crashing down in a matter of weeks and correct back to the levels that the current MS supports. During the 1980s and 90s, it took over 15 years to correct!
As well, only looking at the MS is probably going to be insufficient if its all you are looking at in planning your trades. Its just one of many things to consider when you are researching your investments for your portfolio with the ultimate decision coming from weighing out all factors holistically. But it is definitely something to be mindful of!
And that concludes the lengthy post. Thank you for reading! Leave your comments and questions below!
In this post, I will look at the relationship between the US money supply and the S&P. Well, that was what it was supposed to be. It then turned into a look at how global money supplies affect indices in general because it is a really interesting rabbit hole indeed. So let’s get into it.
Does Money Supply Affect the Stock Market?
The general consensus that I could find in economic research and reports is that, in general, the US money supply and, more generally, global money supplies influence stock markets indirectly. The most obvious way is, money supply is needed to fund global investments in markets. Without money, there would be no way to invest. But there are also some indirect ways that money supply (MS) can influence the stock market. The most notable way is by creating liquidity and influencing behaviour. This is probably the most fresh example as it was arguably one of the biggest fuels on the post-COVID recovery bull run we had. The Federal reserve enacted monetary policy that made borrowing attractive and promoted investment, borrowing and leveraging (which took advantage of very low interest rates).
If we take a look at the chart above, this chart depicts the US money supply against SPX. The data is standardized in Z-Score format to be able to do side by side, direct comparisons. We can see that immediately following the COVID crash, the US money supply began rapidly increasing. This was the result of federal reserve policy aimed at quantitative easing. This was arguably one of the leading causes to the unprecedented growth of the S&P in such a short timeframe.
How has the US Money Supply Affected the S&P 500?
If we zoom out on the above chart and look at the US money Supply since 1959 overlayed against the S&P, we can see, visually, how the US money supply has impacted the S&P 500:
The first thing of note is there is a high degree of correlation between SPX and the US Money Supply, which has a Pearson correlation of 0.98. This is a strong, positive correlation. This means that as the US Money Supply increases, so too should the S&P and vice versa.
We can also see that, for the most part, the S&P’s growth is comparable to the US money supply. As the Money Supply increases, the S&P grows to match this supply. The exception to this was a stint of time between 19843 and 2002 where the S&P outpaced the US Money Supply:
The dotcom crash ultimately led to the S&P correcting back below the US Money supply, where it then recovered to catch back up to the US money supply, and the money supply actually became resistance in 2007.
We then again outpaced the money supply in 2018. This likely could have been a cause to the 2018 correction, which actually brought the S&P back down in line with the current supply at that time:
We then outpaced the money supply again in 2021, which was corrected during the 2022 bear market. However, we have ,yet again, in 2023, surpassed the current monetary supply:
Calculating Money Supply & SPX Price
The relationship between the monetary supply and the S&P is so strong, we can actually calculate the expected range of the SPX based on the current monetary supply. We can also reverse this and calculate what the monetary supply should be to support the current price of SPX.
To calculate the expected range of SPX based on the money supply, we would use this formula:
SPX price = US Money Supply x 1.918^-10 – 114.426
This would calculate what the price of SPX should be within +/- 228 points.
To calculate the needed money supply to support the price of SPX we would use this formula:
Money supply needed = SPX price x 4970424901 + 8.204^11
This would calculate the money supply needed to match the SPX.
So let’s do these calculations.
As of August, the current US Money Supply is 20.903 Trillion. So we substitute:
SPX Price = 20.903 Trillion * 1.918^-10 – 114.426
SPX Price = 3895.01 +/- 228
So the range that SPX should be in based on the money supply is between 4,123 and 3,667.
What about our monetary supply? What should that be to support the current price of SPX?
Well, let’s do the calculations. As of Friday August 25th, SPX closed at 4,405.
Monetary supply needed = 4,405 x 4970424901 + 8.204^11
Monetary supply needed = 23.63 Trillion
So the SPX should be at ~23.63 Trillion in order to support the current price of SPX. That is roughly a 13% increase from where we currently are.
How does an Index surpass Monetary Supply?
This is a great a question and one that I am not qualified or knowledgeable to answer very in-depth. But one way in which the SPX can sustain itself at levels above the current domestic monetary supply is through foreign investment. Indices and stocks are traded internationally and are not dependent on their own domestic currency alone.
Where this gets interesting is if we start looking at global monetary supply. Now, there are no tickers or indices that look specifically at global monetary supply, but what we can do is take the monetary supply of a few nations that have a high degree of international trade and compare the monetary supply among those countries.
You will notice the strong degree of correlation between all the nations in this table. (Keep in mind, these nations were randomly picked based on extent of their involvement with international and U.S. based trade.) If we were to standardize the data into Z-Score format (where we are just looking at the standard deviation) and put it into a line graph, this is the result:
When we standardize data, the difference is very indiscernible. This is because, monetary supply naturally increases at a steady and controlled rate, as to keep inflation under control and create supply and demand.
How does the SPX’s Growth Compare to Global Monetary Supply?
In researching for this post, I was curious how SPX’s growth looked in relation to the global monetary supply. The reason being, the thesis is that SPX’s growth above monetary supply can only be supported by the global interconnectedness of nations and the ability of foreign investment to supplement domestic investment. To do this, I standardized SPX in the same way and overlayed it with the random sample of countries monetary supply. The results are displayed in Chart 1 below.
I found this particularly interesting. I wondered if perhaps this was an American thing where everyone is just simply flocking to US investments. So then I thought to plot out some other indices, namely the TSX (Canada), NIFTY (India), DAX (Germany), and FTSE (U.K.). The results are listed in Chart 2 below.
Well, colour me shook. For the longest time it was actually the DAX and TSX that were just growing beyond the average monetary supply. Who would’ve thought? However, in 2019, SPX began exponentially growing, where it currently sits at approximately 0.7 standard deviations above the average monetary supply.
So what does it all mean?
So the logical question is what does it all mean and how does it help me? And unfortunately, this is a question more for an economist than for me. But I and you yourself can speculate by looking at all the data.
If we turn back to our SPX chart overlayed with the US monetary supply and apply Tradingview’s Cycle lines, we can see that the SPX operates in cycles in relation to the monetary supply:
And using the Sine function:
Essentially, these things are cyclical. We can see the same type of cyclical behaviour when we compare the individual indices to the SPX directly:
All this means is that we should eventually correct back down to the monetary supply, during which time another index will outperform the SPX and take the lead. Then rinse and repeat.
My personal take away from this little research project is twofold.
First, diversification in foreign markets is a smart idea and provides somewhat of a hedge against putting all your eggs in one market and one economy.
Second, you should pay attention to where and when you are investing in relation to the current monetary supply.
If we look at the chart above, the most stable and healthy gains were achieved when SPX was below the monetary supply. Whenever it was trading above, it would frequently experience drops of, on average, 2 standard deviations back down to the monetary supply in a matter of months until eventually correcting with a bear run and then resuming a healthy bull run.
That doesn’t mean you need to wait for a crash or calamity before investing, but its good to pay attention to the extent that a stock may exceed the current money supply. If we look for example at NVDA:
This is not a place I would buy NVDA because this move is likely not sustainable. But if we look, for example, at a stock like Ford (
F):You will see that it is in a much more enticing area for a potential long entry.
Final Thoughts:
Hopefully you found this interesting, I sure did! I want to just say, that I am not saying SPX is going to crash or that we will experience another bear market any time soon. The reality of the situation is SPX has a track record of spending years trading above current monetary supply before correcting. Therefore, its not really realistic to expect SPX to suddenly come crashing down in a matter of weeks and correct back to the levels that the current MS supports. During the 1980s and 90s, it took over 15 years to correct!
As well, only looking at the MS is probably going to be insufficient if its all you are looking at in planning your trades. Its just one of many things to consider when you are researching your investments for your portfolio with the ultimate decision coming from weighing out all factors holistically. But it is definitely something to be mindful of!
And that concludes the lengthy post. Thank you for reading! Leave your comments and questions below!
For real-time updates and premium indicators, consider joining my group at: patreon.com/steversteves
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