Which way is the stock market headed?
Disclaimer: This content does not constitute financial advice. All investing and trading activities are undertaken at your own risk.
Theoretically, the stock market can only move in three major directions: up, down, or sideways. People who make market predictions usually predict where the market is headed within a specific timeframe. Therefore, in addition to predicting the direction, they usually predict the timing as well. In order to be “correct,” they must not only predict the direction of the market but also get the timing right. For example, someone may predict that the market will reach a certain level, but it may take 10 years to get there. No wonder making market forecasts is so difficult, especially over shorter timeframes, when market noise and choppiness can create false signals and mislead many investors.
Ever since the Fed started Quantitative Easing 1 (QE1) in November 2008 and the market bottomed shortly thereafter, in the spring of 2009, the stock market has seen absolutely insane returns practically every single year. The cheap money has led to a parabolic-type chart pattern in the major U.S. indices, which recently peaked around the fall of 2021. Since then, the market has experienced a pullback and attempted to bounce. Looking at a long-term chart, which way is the market most likely headed?
Given what history has shown us, whenever a government has printed this much money, it has typically resulted in not only an inflationary environment, as we are seeing, but also massive gains in the stock market. Never before in U.S. history have we seen this level of money printing. In 2020 alone, over 40% of all the money the U.S. has ever printed in its history was printed.
If the stock market’s uptrend remains intact despite fear and pessimism, the U.S. stock market could easily repeat patterns seen in the Weimar Republic, Venezuela, and Argentina.
What happened to the stock market during the Weimar Republic before Hitler’s rise to power?
Based on the charts, stock prices rose in both marks and U.S. dollars. More and more people began speculating to avoid taxation and earn dividends, until the final holders could no longer expect a return of even 1%.
Here is a chart:
At the end of the Business Insider article from which this graph is taken, the following summary is appears: “Bottom line: In marks, stocks had an amazing run. Even in USD, they had a nice run-up” (Weisenthal).
In Venezuela, inflation hit nearly 1,000,000%.
What did the Venezuelan stock exchange do? It went up over 73,000%.
Let’s look at the Índice Bursátil de Capitalización (IBC), which is also known as the General Index (the main and most important index of the Caracas Stock Exchange):
Finally, let’s take a look at Argentina. According to a Reuters article, inflation in Argentina is nearing 80%. Specifically, “[i]nflation in the 12 months through August hit 78.5%, while prices were up 56.4% in the first eight months of the year” (Nessi and Bianco).
In response to this type of inflation, how has the Argentine stock market performed? The S&P MERVAL Index, the most important index of the Buenos Aires Stock Exchange, has risen approximately threefold since 2021 and has recently begun to move parabolically.
Here is the chart:
Given that all three of these countries have experienced higher inflation rates than the U.S. is currently experiencing and have witnessed extraordinary gains in their stock markets, will the U.S. do the same?
The U.S. CPI inflation rate is just under 10% (though it is probably much higher in reality). Are we about to see a further increase in the stock market as money printing likely accelerates to keep things running? It is certainly possible and probably likely.
Here is a chart of the current expansion of money supply:
Here is a look at what the S&P 500 has done during quantitative easing (QE), which, again, started in November 2008:
Obviously, nobody knows the future with 100% certainty, but the old saying that history repeats itself or rhymes may hold true. Many things are happening right now that suggest the U.S. stock market may experience another blow-off top, especially given that we are in an unprecedented monetary environment. Unlike during the stock market crash of the late 1920s and early 1930s, we now have obscene amounts of money printing and unbelievable levels of debt. The trend is upward (and, as the old saying goes, the trend is your friend), and fighting the Fed hasn’t worked in the past, so it probably won’t work in the future.
If I had to make a market forecast, I would say that we will either see a massive move to the upside or a massive move to the downside, with the upside being more likely. If the market continues to trend upward this fall, I would bet on the former; otherwise, I would bet on the latter. We seem to be at a pivot point, and only time will tell…
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Works Cited
“Bursatil Index (IBC).” Investing.com, https://www.investing.com/indices/bursatil.
“M2.” FRED, 23 Aug. 2022, https://fred.stlouisfed.org/series/M2SL#.
Nessi, Hernan, and Miguel Lo Bianco. “Argentina Inflation Nears 80%; Spiraling Prices Squeeze Shoppers.” Reuters, Thomson Reuters, 14 Sept. 2022, https://www.reuters.com/markets/us/argentina-inflation-nears-80-spiraling-prices-squeeze-shoppers-2022-09-14/.
“S&P 500 Futures Streaming Chart.” Investing.com, https://www.investing.com/indices/us-spx-500-futures-chart.
“S&P Merval Index (Merv).” Investing.com, https://www.investing.com/indices/merv.
Weisenthal, Joe. “Here’s What Happened to Stocks during the German Hyperinflation.” Business Insider, Business Insider, 26 Nov. 2011, https://www.businessinsider.com/heres-what-happened-to-stocks-during-the-german-hyperinflation-2011-11.