Hello,
Markets are continuously rising and it seems we're in a bubble. I have some cash to invest, so I was wondering whether markets are overvalued and that I should wait, or should I invest right away.
What I did to investigate this was to compare S&P 500 with M2 Money supply. My hypothesis is that the rise that we're seeing is because of the extra money supply. If that is the case, then the real question we should be asking is whether market's rise has overshot the money supply.
From the data, it doesn't look like so. Take a look at the historical chart of S&500 / M2 money supply.
You can play with the dataset here.
From the data and the chart, it's clear that the markets may rise even further. Reasons:
- The ratio reached its peak during the 2000 bubble, and the current levels of the ratio are much below that (although they're reaching the 2008 levels)
- Since early 2020, M2 Money supply has roughly increased by 24% while S&P has increased by 15%
It's also interesting to notice that CAGR of this ratio over last 40 years comes to be around 2% which is similar to the annual increase of US GDP. Another way to look at this is that, the 8% annual returns of S&P 500 over the last 40 years can be broken down into two parts:
- 6% annual growth in money supply
- 2% annual growth in GDP
So, in some sense market's real growth has been simply the GDP growth.
What do you think about this analysis?
PS: Sorry, the data isn't very cleanly formatted as I did it very quickly.
Submitted January 21, 2021 at 03:54AM by invertedpassion https://ift.tt/3sKJvus
