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January 20, 2006
M3 and the S&P 500
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Mark Hulbert of CBS MarketWatch Reports: ***Madeline Schnapp, Director of Macroeconomic Research at TrimTabs Investment Research, told me that she and her fellow researchers at TrimTabs have explored the econometric relationships between the money supply data and the stock market "every which way from Sunday" -- and that they have found no straightforward correlation between it and the stock market. As a result, she believes that changes in M1, M2 and M3 are "next to useless" as market timing indicators.Not all hope is lost, however. But we do need to refocus what we pay attention to. According to Schnapp, a much better indicator than the money supply is changes in personal incomes.Fortunately, she says that those trends right now are quite positive for the economy in general and the stock market in particular. "After tax income derived from daily income tax withholdings is up a stunning 14.9% the last four weeks. We attribute this remarkable gain to a combination of healthy year-end bonuses and job growth but no matter how you slice it, cash available to invest is building on the sidelines."What would dissuade TrimTabs from its currently very bullish stance? The only things that Schnapp can imagine derailing the economy and the stock market in 2006 are (a) oil "considerably" above $90/barrel, (b) a 2% to 3% rise in long term interest rates, (c) "spiraling" wages and prices, (d) a 10% decline in real estate nationally, or (e) a global pandemic.***
While I know the Fed is going to stop publishing M3 stats, I have data until the end of last year and will use it for a comparison. Using the 12-month Rate-of-Change indicator on M3, we can see three big moves or trends. The Rate-of-Change declined from 1985 to 1993, but the stock market advanced. The Rate-of-Change even dipped into negative territory in 1993 and the S&P 500 traded flat the next two years. Even though the Rate-of-Change was falling, it was still largely positive and money supply was expanding. The Rate-of-Change for M3 began expanding from 1993 to early 2002. Notice that the Rate-of-Change moved above 10% in March 1998 and this helped fuel the stock market in the late 90s. The Rate-of-Change turned lower in 2002 and declined until the end of 2003. The stock market was basically flat during this timeframe with a dip to the Oct-02 low. Most recently, the Rate-of-Change is on the increase again with a trendline breakout in 2004. Even though Trimtabs does not see a relationship, I find the money flowing and this should underpin the bulls. At the very least, M3 growth above 5% is strong and positive for the economy and stocks.
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Posted by Arthur B. Hill at January 20, 2006 06:42 AM