2023’s US equity rally is all about two things (and they aren’t mutually exclusive): The so-called “Magnificent 7” tech stocks and multiple expansion.
If you’re a bear, it’s been a frustrating experience. Multiple expansion at a time when monetary policymakers are hawkishly inclined is vexing, to put it mildly.
On Monday, Wall Street’s most prominent bear set about explaining 2023’s multiple expansion by way of two factors: Liquidity and the A.I. narrative. This isn’t exactly new territory, but it bears repeating (there’s a lazy pun in there).
If you ask Morgan Stanley’s Mike Wilson, liquidity support is “starting to fade.” He tracks global M2 in USDs, and has repeatedly cited a multi-trillion increase on that metric since October’s equity market lows as a contributing factor to what some are now calling a new bull market.
There’s an ostensible correlation between the YoY change in global USD M2 and equity performance. Stocks are now well out ahead of that “simple relationship,” as Wilson described the link, illustrated on the left above.
On the domestic front, Morgan Stanley’s QDS team uses a liquidity measure comprised of the Fed’s balance sheet, RRP and the TGA. There too, stocks are disconnected. “In the past when these divergences have arisen, they have signaled good times to either buy or sell,” Wilson wrote. “At this time, the magnitude of the divergence is as wide as we’ve witnessed in recent history.” That’s illustrated by the figure on the right, above.
I realize it’s tempting to ask why, if this is so important, stocks haven’t succumbed. There’s no easy answer. The link between various measures of domestic and global liquidity and stock performance isn’t difficult to establish, but it’s very difficult to quantify in a way that’s conducive to precision forecasting, let alone market timing.
As Wilson appeared to suggest, “excitement around A.I.’s potential impact on productivity and earnings growth” was at least as important as liquidity in explaining stocks’ resilience. Sometimes, all equities need is a good narrative. And ChatGPT was ready to write one.
