How the Stock Market Differs from the Economy – Part 2


In Part 2 of our blog, we again thank Jonathan V. Bever for the thoughts and Jim Falcone, Managing Director of Fulcrum Wealth Advisors in Bellevue WA for permission to publish in our blog.

In the following paragraphs, we will lay out the case for the new bull market and identify the risks and consequences of money printing that began in 2008.



For many years, the money supply long term trend has gone up while the fed fun target rate long term trend has been down.

The Federal Reserve balance sheet was under 4 trillion the end of 2019, went over 7 trillion in June of 2020, and has come down a little. We expect it will be higher by the end of the year. The Fed target rate which is 0.10 percent; practically zero.

Taken together the Fed policy went 180 degrees, from tightening to massive stimulation.

We argue if the velocity of money goes up so will the CPI, and we will have a lot of inflation. We believe the reason we haven’t seen monetary inflation because of the Fed money printing is the fact that the money velocity has gone lockstep down with it. Interesting to note the commodity index has gone down as well. The Fed money printing has been essential in providing liquidity as well as fight deflation.



The Fed uses the PCE (Personal Consumption Expenditure Core Price Index) rather than the CPI (Consumer Price Index). It is easy to notice a downward sloping trend which illustrates deflation rather than inflation. Some are concerned that the Fed is all in regarding the fight against inflation and has little chance of fighting inflation should it come in hotter than desired. Some think the Fed not only put the gas pedal to the floor, taking his foot off the brake but has also dismantled the emergency brake and tossed it out the window. We are not in the camp who believes we will have hyperinflation; although, we don’t rule it out completely.



As stated in the beginning, we believe we are headed into a Goldilocks time for our country. Social issues are at the forefront of our populous. We believe the collective consciousness will gradually bring the changes our country needs regarding social issues.

While they will always be with us, we believe the severity will ease. This will bring peace back to our streets, and commerce back to the corner retail shops. Also, low-interest rates in conjunction with moderate to increasing inflation will coexist in peace.

Political economic policy will be accommodating to economic growth. Technology in all sectors, to name a few: healthcare, energy, mining, etc. will be accommodating to economic growth without explosive costs.



As we look at the valuation of the S&P 500, there is no doubt that it is at an above-average P/E ratio.

If we consider the Black Scholes model for pricing a stock option, the denominator is the risk-free rate or the short-term Treasury rate. The lower the denominator the higher the final number. The Treasury rate may turn negative; if so, we are entering a new paradigm for risk asset valuation. As the stock market is an auction each day, we know what the perceived value of each stock is. Where are we going with this? We would not be surprised to see a long period of higher than average P/E ratios on the S&P. So, expecting a market correction because of the perceived lofty valuation may prove frustrating.



In February we wrote that the market would have a total return of around 10%. It looked as if the pandemic would make it impossible. However, the speed of rate cuts and QE brought the bear market to a historically quick end.

Further, finding historical value in the market may be a challenge but should be full of rewards for the patient investor. In the next blog, we will illustrate economic pockets of strength, which we believe is just the beginning of economic robustness.

Finally, as commodities have underperformed for years, we expect they may finally be moving into the spotlight in the years ahead. Ultimately, where to invest? Our answer is simply: there’s no place like home.


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