Financial Markets Surge amid Expanding Liquidity

On September 24, 2024, financial markets experienced a remarkable surge, with various assets hitting unprecedented highs. Notably, the S&P 500 index reached a record high of 5,735 points, while gold prices climbed to $2,670 per ounce. This significant increase in gold represents a remarkable year-to-date rise of 30%, making 2024 the most successful year for gold performance this century, as reported by financial analysts and platforms such as Zerohedge.

However, what are the underlying factors propelling these continuous rallies in financial markets? A detailed examination reveals that liquidity and the overall money supply play pivotal roles in these developments.

The Role of Central Banks in Liquidity Injection

Central bank policies have been instrumental in infusing liquidity into the global economy. As of September 25, 2024, the combined balance sheets of the top 15 central banks worldwide surpassed $31 trillion, a level reminiscent of April 2024. This rising trend has been particularly evident since July 2024, indicating a substantial monetary stimulus primarily aimed at addressing economic challenges and uncertainties. This monetary support has been crucial in bolstering financial markets and investor confidence.

China’s commitment to aggressive monetary easing, in conjunction with the U.S. Federal Reserve’s decisive actions, including a 50 basis point rate cut, has further stimulated market momentum. Following the Federal Open Market Committee (FOMC) meeting on September 18, 2024, cryptocurrencies emerged as the best-performing asset class, reflecting the growing interest and investment in digital currencies amidst traditional market fluctuations.

The CME FedWatch Tool currently indicates a 60% probability of an additional 50 basis point cut during the upcoming meeting scheduled for November 7, 2024. Such a move would reduce the federal funds rate range to 4.25-4.50%, further enhancing liquidity conditions in the economy.

M2 Money Supply: A Key Indicator of Economic Health

Another crucial metric to assess liquidity conditions is the M2 money supply, which encompasses physical currency in circulation, savings and time deposits, and money market mutual funds. According to data from Trading Economics, the M2 money supply has exhibited consistent month-on-month growth, a trend that commenced in February 2024. For instance, in August alone, the M2 money supply increased by nearly 1% month-on-month, underscoring the ongoing monetary expansion. This growth in the money supply is essential in sustaining asset prices across various sectors.

Correlation Between M2 Money Supply and S&P 500

Historically, a strong correlation exists between the S&P 500 index and the M2 money supply, with both indicators moving in tandem over the past five years. For example, during the early stages of the COVID-19 pandemic in early 2020, the M2 money supply bottomed out at $15.2 trillion in February, right before the S&P 500 reached a low of approximately 2,409 points in March 2020. A similar pattern occurred in October 2023 when tightening monetary policies caused M2 to bottom at $21 trillion, shortly before the S&P 500 hit a low of 4,117 points. This relationship highlights the critical role that liquidity plays in driving stock market performance and investor sentiment.

Comparative Growth Rates of Financial Assets

The compound annual growth rate (CAGR) of the M2 money supply has averaged around 7%, whereas the S&P 500 has seen a more robust CAGR of 14% over the past five years. While these figures indicate strong performance, they pale in comparison to Bitcoin’s (BTC) astonishing CAGR of 50% during the same timeframe. Despite its notorious volatility, Bitcoin’s superior growth rate underscores its increasing significance as an asset class, often benefiting from the same liquidity dynamics that prop up traditional financial markets.

Implications of Expansionary Monetary Policies

The expansionary policies enacted by central banks, along with the rising money supply, are driving asset price appreciation across the board. Whether it’s gold, the S&P 500, or Bitcoin, the correlation with monetary indicators like M2 reveals how liquidity remains a crucial driver of asset performance in the current economic landscape. As long as central banks maintain their supportive stance, financial markets are likely to continue their upward trajectory; however, the sustainability of this trend is a pressing question for economists and investors alike.

In conclusion, the intricate interplay between central bank policies, liquidity measures, and market performance illustrates the complexities of today’s financial environment. Investors must remain vigilant and informed about these dynamics as they navigate the evolving landscape of financial assets.