What moves stock prices?

November 19, 2020

Many people think it’s earnings and valuations that move markets, but when you look macro, it’s actually none of those things.

While supply and demand is the underlying mechanism that moves stock prices, what actually moves stock prices in a significant way is liquidity.

Let me share a quote from legendary investor Stanley Druckenmiller…

“Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.”

This is why the old Wall Street adage of “Don’t Fight the Fed” exists…

Just think about the bull market from 2009 to 2020…

Economic growth has been horrible, inflation fleeting, and there is absolutely 0 confidence in the direction of where the economy is headed.

And yet we’re in the biggest and baddest bull market in the history of markets.

S&P 500 looking like this from 2009 to 2020…

The Fed had ~$1T in 2008, and it has grown to ~$7T in 2020. Talk about money-printing gone wild! 

Fun fact: If you look at the Zimbabwe Industrial Index, it has increased by ~550% in 2020 alone. Ever wonder how a country with barely an economy, let alone running water and electricity has a stock market that’s done so well?

Well, Zimbabwe just keeps on printing new money and injecting it into their economy.

Take a look below at the Zimbabwe Industrial Index…

Again, liquidity and sentiment are the two most important fundamentals when gauging what moves stock prices.

You have to understand that the market is always looking forwards and that the biggest lever on future demand is always liquidity.

And at least in the United States, the Fed has control of liquidity. And because printing money is the only lever they can easily pull in order to prevent a stock market crash, the stock market can only go higher.

However, imprudent increase of the money supply will also cause the currency to lose value and lead to stagflation, which means the cost of goods will rise (inflation) while employee wages remain the same (stagnant).

Because of the hyperinflation that have already been kickstarted by QE money-printing, I have been focusing on a ton of energy and commodity stocks because…

1. They’re trading at historical lows when compared with broad market indices.

2. They’re needed for society.

3. They’re critical to political security.

Just take a look at this chart, and you’ll know just how asymmetric the payoff is for investing in commodities over the next 5–10 years…