Sixty years ago, economist Beryl Sprinkel wrote a book titled, “Money and Stock Prices.” Sprinkel was my boss and mentor at Harris Bank in Chicago, and later he became chairman of then-president Ronald Reagan’s Council of Economic Advisers.
His book explained how stock prices respond fairly predictably to changes in the money supply. Sprinkel’s historical data show stock prices consistently react to changes in the money supply in the same direction.
As the Federal Reserve increases the money supply, the extra money lifts stock prices before filtering through to the economy to increase overall spending. The opposite occurs when the Fed slows the growth or reduces the money supply. The shortfall in money drives stock prices down before filtering through the economy and slowing the pace of spending….