The current market is experiencing an ‘everything rally’ where almost every asset class, from stocks to gold to real estate, is on the rise. While many attribute this surge to specific reasons related to each asset class, the reality might be much simpler: there’s simply too much money chasing too few assets. This phenomenon, known as an ‘everything market,’ is characterized by a flood of liquidity and a decrease in investable assets, pushing prices up across the board. This article delves into the reasons behind this trend and explores potential indicators that could signal the end of this bull market.
Jim Paulson, a known market bull, points to a confluence of factors like low short rates, declining bond yields, increasing money growth, and fiscal stimulus as drivers of the rally. However, while this ‘cocktail of support’ might play a role, the primary driver is arguably much simpler. The ‘everything rally’ is fueled by a surge of liquidity, with investors pouring money into a shrinking pool of investable assets. This excessive liquidity creates a demand-driven scenario where prices rise despite high valuations.
Take stocks, for example. The number of publicly traded companies has been declining, with mergers, acquisitions, bankruptcies, and private equity deals reducing the pool of publicly traded companies. This, coupled with a robust appetite for stocks fueled by corporate share buyback programs, passive indexes, pension funds, and institutional investors, has led to a situation where there’s more money chasing fewer shares, driving prices up.
The same dynamic applies to gold. While its demand increases as prices rise, the supply has declined since 2019. This shift has transformed gold from a ‘risk-off’ asset to a ‘risk-on’ asset, mirroring the behavior of stocks.
However, these ‘everything markets’ rarely last forever. The question then arises: what triggers the end of this rally? The answer likely lies in an exogenous event that disrupts the flow of liquidity. This could be a crisis event, a change in monetary policy, or a reversal of investor sentiment. Technical indicators suggest that such a shift in liquidity might occur when it is least expected, similar to historical market corrections.
While the current market conditions suggest bullish sentiment and potential for continued gains in the near term, investors should remain cautious and remember that market cycles are unpredictable. Just like a bull market, an ‘everything rally’ eventually ends, and understanding the driving forces and potential triggers of a shift in liquidity can be critical in navigating market volatility. As Warren Buffett famously said, ‘Investing is a lot like sex. It feels the best just before the end.’
