We have never seen a surge in the monetary base like we are witnessing today.
On October 29, the Federal Open Market Committee lowered the Fed Funds Rate to 1%. This process created a title wave of liquidity. It's the equivalent of a rich relative dumping buckets of money at your doorstep, with a sign attached that says "Help Yourself". Year over year, the monetary supply is up by 48%. Unprecedented.
Money is used in most economic transactions. Increased money supply works by lowering interest rates, and putting more money in the hands of consumers.
It creates investment. It makes consumers feel wealthier, which increases spending. It doesn't happen overnight.
But as it unfolds businesses will respond to their increased sales by ordering more raw materials and increasing production. The spread of business activity increases the demand for labor and raises the demand for capital goods. Stock market prices will eventually begin to rise.
Over the last 82 years, the market has had positive returns 72% of the time. It has been down greater than 20% only 5 times. Markets typically post a 25% return in the 12 months following a correction.
From December 31, 1997 until December 31, 2007 the S&P 500 realized a cumulative return of 77.56%. But, if you were out of the market the results would be different.
- If you missed the 10 best days of the market your annualized returned would have been: 1.12%
- If you missed the 20 best days of the market your annualized returned would have been: (2.55%)
- If you missed the 30 best days of the market your annualized returned would have been: (5.72%)
If you'd like to talk, give us a call.
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