Stock markets love (earnings) growth. But what they love even more is money - the more the better. An abundant supply of money has several advantages for stock markets. A large supply of money goes hand in hand with falling interest rates, which makes stocks more attractive compared to interest-bearing investments. Even if profits remain unchanged, share prices can still rise. However, a large supply of money also leads to an increasing demand for investment if the increasing money supply is not absorbed by the demand for goods and services. Last year, the M2 money supply in the US alone increased by nearly 25 percent.
The average growth in money supply has been 7.1 percent per annum over the past 20 years. The figures for the Euro are not quite as dramatic when compared to the US dollar, but are heading in the same direction with around 12 percent growth in 2020 and an average of just under 6 percent per annum. Most of the growth in money supply has benefited the capital markets, i.e. stocks, bonds and real estate. Even the slump in growth last year caused by the Coronavirus pandemic only slightly impacted the stock markets: At the end of 2020, the MSCI ACWI index was up 6.7 percent in Euro.
Hopes of a growth spurt at the end of the Coronavirus pandemic, coupled with money surplus, has already resulted in the index rising by around 16 percent by mid-2021. This is well above the ten-year average of around 12 percent per annum.
