The S&P 500 (INDEXSP:.INX) set more records in 2019 than in any other year of its existence. It has made the global stock market bigger than the global economy. It has created the most valuable companies on earth in technology. And is shows no signs of slowing down.
Even a brink-or-war series of events barely made it hiccup.
So what will cause the market to fall back into the “What Goes Up Must Come Down” category?
The short answer is: nothing.
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The S&P 500 cannot, and will not be stopped, or even slowed down.
And the reason for that is because it has become its own Self Fulfilling Prophecy.
Think about it.
At least €2.3 billion are created each month by the European Central Bank. This invariably finds itself as Tier 1 capital on the balance sheets of banks, which means it then takes the form of credit with a monetary value of at least 8 times that amount, if we use the Bank for International Settlements Basel 3 rules that stipulate a bank must hold 4.5% of its balance sheet in Tier 1 assets. This guideline further stipulates that a bank should hold 150% of Tier 1 and 2 required capital in the event of insolvency or other cause of non-viability.
The concept governing the justification for such Quantitative Easing – better known as “Fabricating money from thin air” – is that such economic subsidies are necessary to spur the growth of the economy.
What really happens, is the funds are allocated, at least in part, to investment activity by the bank, who of course seeks the best performing assets to deploy its capital into. With the performance of the S&P 500 over the last decade, it and its constituents are the clear winners of that contest. And so for every dollar Fabricated from Thin Air by banks, probably at least 8 finds its way into the S&P. And Voila! A Self Fulfilling Prohpecy is born.
The inflow of capital to the S&P 500 is further stimulated by the fact that that’s where all the big money on the planet is going. So not only does the Self Fulfilling Prophecy look like the best performing asset class – it is, purely in theoretical terms – becoming safer. I mean, where else is money going to? What risk is there that the bloom comes off that rose, as long as governments are free to finance the non-stop flow of capital into those companies via quantitative easing?
There is nowhere else for it to go. Startups – at the other end of the risk scale relatively speaking – are of little to no interest to anyone, because they have the opposite performance metric to the S&P 500.
But here’s something to think about.
Lets look at the biggest companies in the S&P 500. Or even let’s just look at the FAANG stocks, which collectively make up the fastest growing and most valuable stocks in technology.
Not a single one of these stocks was in business before 1975. In fact, except for Apple, none of these companies were in existence before the 1990’s.
Back then, these were all start-ups.
So yes, whereas the safest place to put money right now is in the S&P 500 stocks, you would have done much better to find the early stage companies before they became the monsters they are today.
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