What makes markets move?

There are many different things that makes markets move short term, mid term and long term. First, we need to understand what the markets are. Many think that the markets reflect the economy. While markets are an important part of the economy and both follow a constant contraction/expansion model, they rarely move in the same direction at the same time. Markets are usually 6 months ahead of the economy.

The markets are not some large entities, but a complex system of individual, professional, and institutional investors, each making decisions based on their own views and interests. Each market participant acts and plays freely based on their individual ideas and following their own personal interests. Fund managers, retail investors and financial advisors have different goals and timelines. It’s impossible to foresee the collective result of the reaction and actions of each these groups, and that is what makes markets unpredictable. 

So, the reason stocks and other assets go up and down is less based on the economy, the company’s cash flow, price to earnings ratio and rate of inflation, but more on people’s behavior and reaction to these things. While unpredictable, there are certain parameters and strategies that can be useful to gauge probabilities within the markets.

One of the driving forces behind asset prices is liquidity, but it's not just cash in the bank or central bank magic tricks, it's the entire global financial system. It's statistically proven to drive stock prices, gold prices and even Bitcoin prices.

Michael Howell from cross-border capital was one of the first people in the world to start tracking global equity all the way back in the 1980’s. His idea of picturing all the sources of credit, savings and international capital flowing through the world's banking systems and money markets, including domestic private sector funding, official monetary institutions (central banks) and foreign investors and lenders, can provide valuable feedback on the direction of asset prices. 

Let's talk some numbers. The global liquidity, or TGL, hit a low of $158 trillion in October of 2022, right when Bitcoin, the S&P 500 and Gold hit their recent bottoms. Fast forward to March 2024, the TGL surged to an all time high of $170 trillion and this set Bitcoin up to about 342%, put the S&P 500 up about 15% and gold up by 35%. That is no coincidence. Financial liquidity explicitly drives investors risk appetite and asset allocation. As the pool of available liquidity increases, defaults and other systemic risk should diminish thereby reducing the need to hold safe assets and so allowing investors to expand their investment horizons towards holding more risk assets.

While financial liquidity is usually necessary for an asset boom, is not always enough by itself because bull markets typically need a fundamental theme to stimulate and sustain investor interest. AI has been providing that for 2024. It’s important to understand that global liquidity has an effect on financial markets, no matter where your investments are based. Markets are intertwined and liquidity decisions in the US, China or anywhere else will affect your investments.

In 2008 during the great financial crash, global equity plummeted, and that triggered a massive sell off across financial markets. Central banks around the world stepped in and injected liquidity to stabilize the system and we saw the same thing during the COVID-19 pandemic, when they shut the economies down and central banks again, flooded the markets with liquidity which sparked a rapid recovery in asset prices at the end of 2020. These crisis sparked liquidity influxes are also called Quantitative Easing, and the downside of that is inflation.

Where is Global Liquidity headed? 

Global liquidity doesn't just rise continuously but moves in cycles that historically last around five years. Currently we are still in the midst of this surge from $158 trillion to $170 trillion. We’ve been in there for only 20 months, and despite the monthly increase being slower than the previous surge, the probability of a continued bull market is quite high since the historical average for these scenarios over the last 100 years has been 30 months.

The US federal debt, which is an important measure, is rising by around $1 trillion every 90 to 100 days and that implies that liquidity will continue to grow, especially since neither one of the 2 front runners of the US election has any plans to reduce the deficit. All that will push inflation higher than we would like to, but it will also set the stage for another year with possible double digit returns as most of your portfolios have experienced last year.

Then there is China who started pumping billions of dollars into their troubled commercial real estate sector. That as well is very bullish for global liquidity.

It’s also good to keep an eye on Bitcoin which has become the ultimate barometer for liquidity. Its price movements sync almost perfectly with TGL and during times of abundant liquidity bitcoins gains have far outpaced those of any other major assets but also conversely during crunches bitcoins price dropped significantly.