If you’re a regular reader of the Cabot Wealth Daily, you’ve no doubt seen reference to the 100-year stock market chart. You’ve likely also read comments to the effect of, “There’s always a bull market somewhere.” And former Cabot CEO Tim Lutts wrote frequently about the importance of remaining optimistic in the face of bad news, corrections and bear markets. As Cabot’s resident pessimist, I’d like to offer an explanation as to why, even when the news is at its worst and it seems like the wheels may be about to fall off the economy, it’s almost always a bull market.
[text_ad] It’s important to keep in mind that the average bull market lasts around five years (although some estimates are as low as 3.8 years), while the average bear market lasts between nine and 13 months. In other words, 70-80% of the time, stocks are in a bull market. That’s reflected in historical returns for equities, the mantra that “time in the market beats timing the market,” and widespread guidance that, when faced with uncertainty, odds favor that you’re better off simply staying invested.
(If you don’t know what to do, do nothing.) There’s one simple reason for all of this, and I’m going to share it in the chart below: That chart, from MacroMicro, is the World M2 Money Supply (in billions of dollars), and it shows that in the last 30 years, global money supply has risen from $12 trillion to over $90 trillion. Quoting MacroMicro: “The ‘World – Major Central Bank M2 Money Supply’ data presents the M2 money supply figures of the four major central banks: the Federal Reserve System (Fed) of the United States, the European Central Bank (ECB), the Bank of Japan (BOJ), and the People’s Bank of China (PBOC).
“M2 money supply encompasses the total amount of money in circulation within a country or region, including cash, check deposits, savings deposits, and other liquid deposits. “This data reflects the total money supply managed by these major central banks, offering valuable insights into global monetary policies and economic conditions.” Why M2 Money Supply Means It’s Always a Bull Market So, why does that chart show that it’s always a bull market? Put simply, money has to go somewhere.
Of course, it’s important to remember that money flows don’t benefit all assets or segments of the economy equally. In other words, it’s not always a bull market everywhere. Japan, famously, suffered a lost decade, and U.S. tech stocks (as measured by the Nasdaq) took 15 years to fully recover from the dotcom crash.
But, nonetheless, money flows to the areas where investors (large and small) believe it will be most productive and offer the greatest gains. Sometimes that’s into U.S. markets (where it’s been flowing for the last few decades), sometimes it’s overseas (as we saw earlier this year). At other times, that moneyflow moves into fixed income, hard assets like gold, or cryptocurrencies like Bitcoin.
If you think of money supply as a tide that’s coming in, you can think of different assets as tidepools. The waves don’t fill each pool evenly at all times, but in the aggregate, higher tides mean fuller pools. It’s also important to note that this is not just a reflection of inflation eating away at the purchasing power of your dollars.
With a long-term growth rate of 6.9%, Money Supply outpaces inflation (the average U.S. inflation rate is 3.3% over the last 120 years) because M2 Money Supply factors in liquidity growth from all sources, including inflation, productivity gains, population growth, resource monetization, etc. It won’t always be distributed evenly, and we’ll continue to see bear markets pop up here and there across the globe, but think of those bear markets more like oscillations, with the M2 Money Supply being the long-term upward trend. As long as governments are printing money, the world is growing, and productivity is improving, there will be a rising tide pushing money somewhere.
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