Equity Valuations And Monetary Measures Say Time To Go Back To Harbour

Atle Willems, CFA profile picture
Atle Willems, CFA


  • Key monetary measures now signal the U.S. bull market is at or near its peak.
  • Meanwhile, stock market valuations are at euphoric highs strongly suggesting the risk of a major correction outweighs any upside potential.
  • The U.S. stock market really is in unchartered territory this time, not due to extreme valuations alone.
  • Investors should therefore contemplate going back to harbour to figure things out and return when valuations and downside risks are lower.

The stock market moves in cycles. Over the longer term fundamentals rule, of which the money supply play a more central role than many realize as it affects nominal corporate sales and profits (which are of course stated in money terms).

Over the shorter term investor appetite play a more prevalent role. This becomes noticeable near market tops when greed drive prices above what any reasonable assessment of fundamentals would suggest and during market crashes when fear dominates and fundamentals for a while become largely irrelevant.

Today, ten years on from the previous bull market peak, it is more challenging than any time during this entire upswing to find a sufficient amount of sound explanations as to why U.S. stock market valuations should be anywhere near the current extraordinary highs.

With one exception of course; the ultra low level of interest rates. That is to say, it is largely low interest rates alone and the speculation they motivate that now drive Wall Street to ever new highs though they cannot become much lower.

But any investor hanging his hat on this one factor is assuming an extraordinary level of downside risk and bleak prospects for positive returns.

Just like an apple in the air must drop to the ground, an inflated asset must at some stage deflate - it is perhaps the nearest modern-day economics will ever come to physics. This is more true today than arguably at any stage during this entire bull market as even the money supply impulse has now become an adversary, as opposed to an avid supporter, of further stock market gains.

In fact, the money supply growth rate is now the lowest it has been during the entire period since the 2008 U.S. banking crisis.

Meanwhile, money supply volatility has been increasing rapidly all

This article was written by

Atle Willems, CFA profile picture
Atle Willems, author of "Money Cycles", is an analyst with Liabridge Economic Research. He holds a masters degree in finance with distinction from Nottingham University Business School and a BSc in Business Administration from Drake University.

Disclosure: I am/we are short MYY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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