Gold, stock market and big cake are all soaring, and the US M2 money supply is approaching a new high: Is the bull market really coming?

Financial markets hit new highs, with the S&P 500 reaching 5,735 points and gold prices exceeding $2,670 per ounce. The central bank's loose policies and liquidity supply have driven asset prices up, and the future market needs to be continuously observed.

Financial markets hit new highs: Gold and stocks soar

Recently, global financial assets have hit record highs. Among them, the S&P 500 index reached a record high of 5,735 points, and the price of gold also soared to $2,670 per ounce. The price of gold has risen by more than 30% this year, making 2024 the best year for gold since the beginning of this century. This surge in asset prices has attracted great attention from the market to the driving factors behind it.

Liquidity and money supply: the twin engines driving the market

In-depth analysis found that the loose monetary policy and liquidity supply of global central banks are the main reasons for the market rally. As of September 25, the total balance sheet of the world's top 15 central banks has exceeded US$31 trillion, a level last seen in April 2024. This figure has continued to rise since July, reflecting the massive monetary stimulus implemented by central banks in response to economic challenges and uncertainties.

China's massive monetary easing, combined with the US Federal Reserve's aggressive 50 basis point rate cut, further fueled the market's upward momentum. The market is pricing in a 47.2% chance of another 50 basis point rate cut at the November 7 meeting, which would bring the Fed's benchmark rate range down to 4.25% to 4.50%.

Another key indicator is the M2 money supply, which includes cash in circulation, deposits, and money market funds. According to Trading Economics, the M2 money supply has continued to grow every month since February 2024. In August alone, M2 grew by nearly 1% month-on-month, indicating continued monetary expansion. The increase in money supply has played a key role in supporting asset prices.

Historical Correlations: Money Supply and Market Performance

Historical data shows a strong positive correlation between the S&P 500 and M2 money supply. Over the past five years, the two have risen in lockstep. For example, during the COVID-19 pandemic in early 2020, M2 bottomed out at $15.2 trillion in February, and then the S&P 500 fell to a low of about 2,409 in March. A similar situation occurred in October 2023, when tighter monetary policy brought M2 down to $21 trillion, and soon after, the S&P 500 also fell to 4,117. This correlation highlights the critical role of liquidity in stock market performance.

Over the past five years, the M2 money supply has grown at a compound annual growth rate (CAGR) of 7%, compared to a 14% CAGR for the S&P 500. While this represents strong performance, it is still outperformed by Bitcoin’s 50% CAGR over the same period. Bitcoin’s high growth rate reflects its growing prominence as an asset class that often benefits from the same liquidity dynamics as traditional markets.

Can the market boom continue?

Expansionary central bank policies combined with rising money supply are driving up prices of all types of assets. Gold, the S&P 500, and Bitcoin all show clear correlations with monetary indicators such as M2, indicating that liquidity remains a key driver of asset performance in the current economy. As long as central banks continue to provide support, financial markets are likely to continue to move higher. However, the sustainability of this trend remains a question of concern in the future.