(Drivebycuriosity) - In 2024 the US stock market rallied again. The S&P 500 climbed 23%, the Nasdaq Composite gained 29% and both finished close to all time highs (macrotrends). The logarithmic scale image below shows how the S&P 500 advanced in percents.
( source)
The gains are no surprise. In the long run the stock market accompanies the upward trend of the global economy and the rise is even accelerating, driven by the technological progress. The charts show that bear markets, meltdowns and crashes are temporary and followed by new all time highs. 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.
( source)
In 2024 the stock market benefited from 2 tailwinds: Inflation is receding and the technological progress is gaining speed - driving the company earnings. I assume that both tailwinds will continue and will lead to new highs.
Receding Inflation
Inflation peaked already in June 2022 with 9.1% and dropped to 2.7%. The recent inflation was caused by a deluge of money. In 2020 & 2021 the Biden government flooded the economy with stimulus checks in the value of trillions of dollars to fight the Covid19 recession (American Rescue Plan). The government checks got financed by massive bond purchases by the Federal Reserve (Quantitative Easing known as QE1,QE2 & QE3).
The government money landed directly on the bank accounts of the Americans, blowing up the money volume M2 (bank notes & coins & deposits at banks). Milton Friedman described this as helicopter money (cato ). As a result in 2021 & 2022 the US money supply M2, the engine of the inflation, jumped 40%. The money deluge met a constrained supply of goods & services partly - partly because of Covid19.
Causal Connection
We learned from Milton Friedman that “Inflation is always and everywhere a monetary phenomenon” and inflation happens "when too much money chases too few goods". The causal relationship between money supply and inflation was already recognized by Nicolaus Copernicus.
The astronomer explained in the year 1517 why "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 send 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 restrained supply of goods & services. The flood of money raised suddenly the demand for scarce goods & services and caused a jump of the price level.
Elaborated studies by Milton Friedman, Karl Brunner, Allan Meltzer and many other economists (known as Monetarists) described already in the 1960s how and why the inflation rate follows the growth rate of money with a time lag (causal connection).
( source)
Fortunately the money flood ended already in 2022 and the money supply M2 shrank for a while. Since October 2023 the money volume is growing again, but only moderately (chart above). Since inflation follows the growth of money, the inflation rate (growth rate of prices) will follow the pull of the slowly growing money supply and the inflation rate will stay low.
Significant Acceleration
The second tail wind is generated by technological progress. This tail wind exists at least since begin of the industrial revolution and explains the curves shown above. But it seems that technological progress is even more accelerating, thanks to Artificial Intelligence (AI).
Microsoft, Google, Amazon, Tesla and many 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).
Both
tailwinds should continue in 2025 - and the push by technology might even get
stronger. Inflation will continue the way south, following the moderate growth of the 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!
