February 2005
Economic Growth vs. Money Flow Presentation:
Stock Market returns are affected by two primary factors:
1. Economic Growth
2. Money Flow
The effects of economic growth are fairly obvious, but money flow typically receives very little attention.
However, in a zero economic growth environment, stock market returns are entirely dependent upon money flow. Simply stated, money flow determines whether money is entering or leaving the market.
Interestingly enough, money flow typically mirrors economic growth. When the economy is expanding and market returns are good, people are more likely to put additional money into the stock market. This is positive money flow, because more money is entering the market than is leaving it. In this case, money flow will have the synergistic effect of further boosting stock prices.
However, when investors feel that economic prospects are limited, the market experiences a period of negative money flow. Due to various reasons, investors are more willing to sell than they are to buy, and stock prices typically decline.
Over the course of his or her career, a person will make numerous contributions to the stock market, and this is positive money flow. However, this person will eventually begin to liquidate these assets in order to fund his or her retirement, and this is negative money flow.
We need to avoid a situation in which the current generation of stock investors is simply transferring ownership to the next generation. In the absence of solid prospects for sustained economic growth, these investments will ultimately provide poor returns. Unfortunately, the current generation is heavily invested in stocks, and as they begin to retire, large amounts of money will likely flow out of the stock market. We cannot allow Social Security assets to be used to provide liquidity for these investors.
Under the right set of circumstances, it certainly makes sense to be invested in the stock market. However, at this particular time, investing Social Security assets in the stock market is not advisable.
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