with Taylor St. Germain


What are the latest trends showing in the stock market, and how might those trends impact the economy at large? Find out in our latest TrendsTalk episode with ITR Economist Taylor St. Germain!



The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Hi everyone. My name’s Taylor St. Germain, and welcome to this edition of TrendsTalk. I’m joining you from our home office in New Hampshire, which is why my background might look a little bit different. So happy to be joining you from New Hampshire today instead of Colorado. Today, I wanted to discuss the stock market, in particular some concerns that we have as it relates to the stock market. We see a storm cloud looming out there based on some of our economic fundamentals and trends, and I wanted to share some of those relationships with you here today. The first relationship that I wanted to bring up is the relationship that corporate profits in the S&P 500 have to one another. We look at these two data sets, we plot them on the same scale, we plot them on a log scale, so we’re not debating scales, we’re looking at them in relationship to one another.

And what we notice is that there are times where the S&P 500 will trend above corporate profits. We saw that before the 2000s downturn. We saw that before the financial crisis, and that’s what we’re seeing now. There’s a pretty big gap between the S&P 500 and corporate profits, meaning that the S&P 500 trend is elevated compared to the corporate profits trend. So why is that concerning? Well, we’ve seen throughout history, like the time periods I’ve mentioned, that market forces realign these trends, realign the prices trends, the S&P 500, with the overall corporate profits trends. So when we see a gap between those two trends, it’s a cause for concern. And that’s what we see right now is the S&P 500 is quite elevated compared to the corporate profits trends. So it’s a reason to be concerned about the stock market moving forward because market forces have a way of aligning those two trends with one another.

Another reason we’re a bit concerned about the stock market is based on the money supplies relationship to the stock market. And so what do I mean by that? We look at the S&P 500, the 1/12 rate of change, the month-over-month growth rate compared to the M2 money supply. That’s the year-over-year growth rate for the M2 money supply. And what we see is that during times where the money supply is expanding, the stock market typically benefits. But the opposite is true when we look at contractionary money supply, seeing decline in the money supply, that typically means downside pressure on the overall stock market. Many of you may remember that during the pandemic, we increased the money supply as a country, the Federal Reserve here in the US in a very meaningful way, and the stock market benefited.

But now we’re seeing that annual growth rate for the money supply, not just declining, but below the zero line, and that suggests downside pressure for the stock market. Now, we might not currently be seeing that from the stock market from an overall perspective today, but it suggests that there’s this storm cloud looming out there. Our ITR optimizer, which is a tool that we’ve developed with ITR’s methodology and understanding in conjunction with our financial advisors that looks at the stock market, suggests that we should be in cyclicals right now. So it’s not suggesting that we should necessarily be in a defensive position, but rather being in cyclicals. And so based on the relationship with corporate profits, with the monetary policy, with our ITR optimizer suggestions, there’s cause to be concerned as it relates to the stock market. Now, again, I’m not a financial advisor.

I’m not here to give you individual stock advice. I’m just here to share with you what our optimizer suggests and what some of our economic fundamentals suggests, and that’s a cause for concern moving forward. So it’s important you have these conversations with your individual wealth advisor to ensure you are positioned correctly in the stock market as we see this dark storm cloud looming out there. If you want more information on our optimizer and getting involved with our optimizer, more information about our optimizer, please send us an email. Happy to share some information about the optimizer with you.

If you’re looking for a financial advisor, we have a great one here at ITR that we all work with, Bellwether Wealth. We’re happy to put you in touch with them as well. So again, in summary, we should be concerned, we should be cautious, but it’s important that in any economic business cycle, whether it’s the economy or the stock market, there’s always opportunities. And it’s important at this time that we’re having those conversations on finding those opportunities even when there’s some storm clouds of looming out there. So I hope you found this information helpful. Thank you very much for joining me on this episode of TrendsTalk. I’m Taylor St. Germaine with ITR Economics, and I’ll see you next time.