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What are the implications of this and is it a bad thing?
What would the market look like if we corrected for the money supply?
PS: I'm asking here because when asking at other places I was told to just not worry about it.
The stock market represents only a part of the total capital stock, as not all capital is owned by companies, and not all companies are public. But, on the whole, one should expect the stock market to rise over time so long as society is not dying.
Just my 2 cents. I'm not a professional anyway.
Over time, humans produce capital. Insofar as this capital is productively deployed, one should expect the total amount of capital stock to increase. The stock market represents only a part of the total capital stock, as not all capital is owned by companies, and not all companies are public. But, on the whole, one should expect the stock market to rise over time so long as society is not dying.
That's the rub, eh? Are there limits to the growth on a finite planet? Is climate change posing an existential threat? Has technology produced highly scalable and entirely altogether too interdependent international production systems?
The second sentence doesn't follow from the first. Owning stock literally means owning part of a company. Now the worth of that ownership is determined by what people are willing to pay, and what people are willing to pay is subject to all the whims of human judgement. The money supply is just one piece of that though, it's not the end-all-be-all (not for stocks, and not even for "inflation"). For one thing, the perception of the money supply and the stock market as a whole are major influences, but the fortune and perception thereof of individual companies will move related to its performance which over time will diverge from broader macroeconomic trends.
- Population growth
- Growth in productivity per capita
- Dividends
- Inflation
It used to be that populations were growing and productivity was increasing and dividends were high (becuase PEs were normal). Those days are all over. You can forget about seeing any return above inflation. Population growth has slown to 0.5% (down from about 1.5%+). Productivity per capita is almost 0 for the last 20 years (down from 2% per year for the last 200 years prior). Dividends which used to be 4.5% in the 60s+ and 6%+ at 1900-1950 are now down to about 1.3%.
So, the answer to your question, at least going forward from here is NO, it's mostly just going to be inflation plus 1.3% from dividends. Note, this was not the case for the last 100 years.
There are several components that make up long term stock returns (from a macro level): - Population growth - Growth in productivity per capita - Dividends - Inflation It used to be that populations were growing and productivity was increasing and dividends were high (becuase PEs were normal). Those days are all over. You can forget about seeing any return above inflation. Population growth has slown to 0.5% (down fr…
I'm not an economist, but I have some speculation (no pun intended):
When the government prints money, most of it ends up with the rich. The smart rich know that it's unwise to have lots of money lying around, so they buy investment assets, like real estate and stocks.
When quantitative easing started in 2008-ish, guess what got more expensive? When COVID hit and money printer go brrrr, what got more expensive?