Stock Market 2024: A Tale Of Two Tailwinds

(Drivebycuriosity) - In 2023 the US stock market did what it always does: Snapping back from former losses and climbing to new highs. The Charts above (S&P 500 macrotrends) confirm this. The logarithmic scale image below shows the S&P 500 advances in percents.

 

In the long run the stock market follows an upward trend and the rise is even accelerating. Bear markets, meltdowns and crashes are temporary and great purchasing opportunities. Below I display the famous very long term stock market chart which cannot be shown often enough. The curve mirrors the persistent exponential growth of global wealth, driven by technological advances.

 

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But what was special in 2023 and what might determine the stock market trend in 2024? 

                     Receding Inflation

1. Inflation is receding - opening the way for the Fed to cut her interest rates in 2024. High inflation & rising interest rates caused the bear market of 2022.

 

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Inflation peaked already June 2022 with 9.1% and dropped to 3.1%. The high inflation was caused by a flood of money in the past. In 2020 & 2021 the US government flooded the economy with stimulus checks in the value of trillions of dollars (American Rescue Plan), supported by huge bond purchases by the Federal Reserve. 

The government money landed directly on the bank accounts of the Americans, blowing up the money supply M2 (bank notes & coins & deposits at banks). Milton Friedman described this as helicopter money (cato ).

 

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As a result, in 2020 & 2021 the US money supply M2 jumped about 40% (chart above). The money deluge met a constrained supply of goods & services, partly because of Covid19. 

"Inflation is caused by too much money chasing too few goods and services", noted the economists at fisherinvestments. "It is no surprise that prices increased so much", comments Tyler Cowen, Professor at George Mason University (marginalrevolution).

But monetary growth peaked already in February 2021 (with plus 27%). Since then the monetary growth rates have been falling and turned negative in December 2022. In the recent months the money supply has been shrinking! In November M2 dropped 3% YoY ( fred.stlouisfed  ycharts).

 

                   Causal Connection 

The causal connection between money and inflation is known since the 16th century at least. Nicolaus Copernicus had already describe by the year 1522 how "too much money" causes inflation. Copernicus` "quantity theory of money" is based on observations:

Early in the 16th century Spain conquered today`s Latin America and looted the silver stocks. The Spaniards sent the precious metal to Europe where is was printed into coins and used as money.

As a result the European money supply jumped, meeting a constrained supply of goods (agriculture, hand works) &  services. The flood of money suddenly raised the demand for scarce goods & services and caused a jump of the price level.

Elaborate studies by Milton Friedman, Karl Brunner, Allan Meltzer and many other economists (known as Monetarists) already described in the 1960s how and why the inflation rate follows the growth rate of money with a time lag (causal connection).

Since inflation follows the growth of money, the inflation rate (growth rate of prices) will follow the pull of the shrinking money supply and the inflation rate will continue to drop in 2024, pulling the interest rates with them and causing a tail wind for the stock market. 

 

            Significant Acceleration

 

2. And there is a second tail wind, generated by technological progress. This tail wind exists for many years and explains the curves shown above. But it seems that technological progress is accelerating, thanks to Artificial Intelligence (AI). 

Microsoft, Google, Amazon and other technology companies are developing and training large language models such as ChatGPT,  “which are vast systems based on deep neural networks that have been trained on massive amounts of data and can then be adapted to perform a wide range of different tasks" (brookings ).  

These advanced software systems will not only foster revenues & profits of the leading AI corporations. The Brooking study claims that "large language models such as ChatGPT are emerging as powerful tools that not only make workers more productive but also increase the rate of innovation, laying the foundation for a significant acceleration in economic growth" ( brookings).

Baidu, the leading Chinese search engine, declared that their AI system will "power agricultural enterprises to promote innovation and to optimize energy use, resource allocation, and waste reduction, and to improve disease diagnosis in health care industry, therefore, enhancing people's well-being and the quality of life" (seekingalpha ).

Both tailwinds should continue in the coming months - and might even get stronger. Inflation will continue the way south, following the pull of the shrinking money supply, and is getting closer to 2%. The rapid progress of AI - which seems to accelerate - should raise company revenues & profits in the coming quarters significantly, fueling further stock market gains.

Enjoy!