Stocks Can Keep Rising After Interest Rate Cuts

The article contends that the sustained rise in stock prices, particularly the Nasdaq, is primarily attributable to an expanding U.S. money supply (M2), which has resumed its ascent to an all-time high following a contraction. While acknowledging that interest rate cuts have historically preceded recessions, the author argues that increased M2 acts as a significant liquidity tailwind for asset prices, overriding concerns about interest rate dynamics. This suggests that despite potential market inflation, investors face a greater risk of missing further gains in a liquidity-driven bull market.

Analysis

The analysis posits that the sustained strength in equities, particularly the Nasdaq, is more dependent on monetary liquidity than on the direction of interest rates. While a recent 25 basis point rate cut by the Federal Reserve is noted, along with the historical precedent that all recessions this century were preceded by rate reductions, this factor is presented as secondary to the influence of the U.S. money supply (M2). After a period of contraction through 2022 and 2023, M2 has reportedly resumed its growth to an all-time high. This expansion acts as a powerful tailwind, as increasing liquidity chases financial assets, directly supporting higher stock prices. The prevailing market condition is therefore a conflict between the bearish signal of pre-recessionary rate cuts and the bullish force of a liquidity wave, suggesting the immediate risk of missing further gains in a bull market outweighs the risk of a valuation-driven correction.

Key Decisions for Investors

• Investors should prioritize monitoring U.S. M2 money supply data, as its expansion is identified as the key tailwind supporting equity prices, potentially overriding traditional signals from interest rate policy.
• Given the strong liquidity impulse, it is prudent to maintain exposure to the market to avoid the opportunity cost of missing further upside, while remaining cognizant that asset prices may be inflated.
• Rather than attempting to time a market top, a tactical shift to a more defensive posture should be considered only after technical indicators confirm a reversal, such as a sustained pattern of lower highs and lower lows on major indexes.