The Stock Market: Doing Well

The S&P 500 rose to a new historical high on Thursday.

This is the 22nd “all-time high” of the year.

There are several things to focus on.

First, the economy is doing well. On Friday, the fourth quarter numbers for 2023 were revised upwards.

Second, the excitement over artificial intelligence technology continues at a high level.

Three, there are expectations of at least one, if not two or three, cuts in the Fed’s policy rate of interest coming this year.

Note also that consumer confidence rose to its highest level in almost three years.

And, there seems to be plenty of money around.

Looking at the Fed’s monetary statistics, even though the Fed has put the banking system through two years of quantitative tightening, the M2 money stock has grown at an annual compound rate of growth of 8.0 percent over the past four years.

In other words, the economic situation looks pretty good and this bodes well for further stock market gains.

The one issue that seems to be hanging on is that of inflation.

The most recent inflation numbers have come in higher than expected…or, desired.

Federal Reserve Governor Chris Waller, in response, stated that “there is no rush” to cut the Fed’s policy rate of interest, given this recent information.

But, the story is a longer one than this.

Look at how the S&P 500 stock index has performed over the past 18 months.

The bottom for the S&P 500 reached in mid-October 2022 was 3,577.

On Thursday, March 28, 2024, the S&P 500 closed at 5,254.

This is a gain of 46.9 percent…not too bad.

This is not a result that could be achieved by a market where investors were starved for money, where an economy was entering into or in a recession, or where there was nothing positive to grab hold of.

And, the positive news seems to keep on coming.

In the 2010s, Fed Chairman Ben Bernanke started the Federal Reserve off on a new model for achieving economic growth with only modest inflation.

The model was centered around a “new” approach to monetary policy…quantitative easing…or, quantitative tightening.

This has been the foundation of what is going on right now.

Mr. Bernanke wanted to create an environment where monetary policy contributed to rising stock prices which would, in turn, raise consumer wealth, which would, in time underwrite economic growth.

And, there would not be much, if any, to increase inflation.

Looking back at the past 15 years or so, the policy structure that Mr. Bernanke introduced seems to have worked.

And, it seems to be working well now, even though we are going through a period of quantitative tightening.

The Federal Reserve, through quantitative easing, put a lot of money into the economy. Over the past two years, the Fed has been cautiously working to remove some of this money and keep a lid on inflation.

This policy seems to be doing very well.

In the meantime, investors are profiting from the effort as stock prices have been rising…and rising…and rising.

Wow!

A 46.9 percent rise in two years.

Current Federal Reserve Chairman Jerome Powell has recently talked about reducing the amount of quantitative tightening going on.

But, this is still in the future.

And, as Governor Waller stated, as quoted above, “there is no rush.”

Still, the foundation of the Fed’s policy stance is what it is doing to reduce or increase the security portfolio.

It doesn’t want to move too quickly. And, what it is relying on now is what is called “forward guidance.” Federal Reserve officials “talk” about what might be coming down the road.

This helps to set the tone of the markets.

And, in the 15 years or so that the Federal Reserve has been executing this program, the market…investors…seem to be showing a lot of “trust” in what the Fed officials are doing.

As a consequence, investors can expect more of the same going forward.

This, I believe, is a very positive conclusion for the future of stock prices.