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The dollar as the worlds global reserve currency is the most important currency to track. It's the most influential in terms of the global economy. A strong dollar is not necessarily good news for global stock markets. Both the SP500 and global funds tend to move in the opposite direction to the almighty US dollar. If the stock market rallies into a strengthening dollar it could be a sign of a 'bull trap' with sellers cashing in at the top creating headwinds for the SP500 and therefore our global stock market funds.
M2 Money Supply - Liquidity
M2 Money Supply - Liquidity
'Liquidity' is quite possibly THE main driver for stock market booms and busts. The overall measure of liquidity (money) in the US is the M2 money supply. A great example of how an injection of liquidity by central banks leads to booms in stocks is the 2024 'parabolic' move which started in November 2023 and lasted about 6 months.
When M2 is plotted on a chart relative the the US SP500 equities index, the 2024 level on the right hand side below is ABOVE both the Great Financial Crisis and the Covid/2022 inflation crashes when everyone thought the word was about to end.
This massive liquidity injection is more than likely the reason for the 2024 'parabolic' move up in equities, althoigh a perfect storm also occurred with the narrative of incoming interest rate reductions and no recession... the 'soft-landing' hypothesis... which 'the market' bought hook line and sinker. The market then started selling off when the move reached exhaustion.
We know that liquidity drives the stock market index price of the SP500. If we were getting really technical then there are liquidity charts which combine different components of liquidity that combine to form an accurate measure of real liquidity injected or removed by central banks. This might be something like... actual liquidity = Feb Balance sheet SOMA (this is also on FRED site), minus the Reverse Repo RRP (this is also on FRED site), minus the TGA (this is also on FRED site).
We'll leave that for another day but for now the standard M2 money supply for the US is possibly the biggest driver in the biggest component of our global funds so this is a good approximation. (We will be showing global liquidity charts and global M2 money supply in the future so stayed tuned in by signing up to the BBI monthly newsletter)
Global Liquidity is a highly specialised area and I wont pretend that I am in anyway an expert. There will of course be different measures of liquidity. The chart above shows the liquidity cycle rising up into the end of 2024 but this Trading View Index shows small global liquidity declining since early 2022. As I understand it though there were indeed liquidity injections by central banks to jumpstart the economy/markets from the slump of 2022 so I would tend to go with the Cross Border Capital chart above.
MACRO MICRO ME
One of the things we watch out for is the rate of global central bank hikes or cuts. An aggressive move up in rates (hikes) means that inflation is getting out of control and that's generally bad for both stocks and bonds...
Interest rate expectations tell us where global central banks are likely headed...
Another warning sign we watch out for is the rate of increase of central bank balance sheets. If the balance sheet of a central bank starts to hike up, then it suggests there is something amiss within that country's financial markets and might spell problems for stocks and bonds...
At Boom Bust Invest we cover global financial markets, not just the US SP500, but even so, the SP500 will still be about 65% to 75% of a standard global stocks fund depending on which one you're invested in. For this reason, we do need to watch the Fed more closely...
MacroMicroMe is an excellent online resource. This article summarises the charts above.
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