NASDAQ Price Inflation vs Money Supply Inflation

2 Eyl 2020

Much of the recent growth in the stock market can be attributed to the basic law of supply and demand.

There's been around a 25% increase in the money supply from the pre-coronavirus baseline.

There are the same number of stocks being chased by all the extra dollars, So if nothing else changed, this would result in a 25% increase in overall average stock prices.

However, the coronavirus factor has restructured the revenue distribution share causing losses in the traditional economy and gains in the tech sector. As a result, we see the following changes from the baseline:

More traditional S&P companies: 9% up from the baseline
Tech-heavy NASDAQ: 36% up from the baseline
FRED:MZM: 23% up from baseline

In order to know if the NASDAQ is in overvalued bubble territory, we need to know how much NASDAQ revenues have increased since the lockdown started.

NASDAQ gains 36% - 23% money supply increase = 13% difference

So if NASDAQ revenues are up greater than 13%, the NASDAQ is still undervalued. If revenues have increased less than 13%, then we're in a bubble caused by FOMO (fear of missing out).

The good news for NASDAQ investors is that NASDAQ earnings are up 61% from pre-coronavirus levels.

This suggests the top for the NASDAQ is an 83% increase from the pre-corona baseline (22% from money supply inflation and 61% from extra earnings).

Thus, the NASDAQ likely still has 53% higher to go before it's overvalued (83% total - 36% current increase so far).