Editor’s note: “The Key Factor to Successful Stock Predictions” was previously published in February 2023. It has since been updated to include the most relevant information available.

When it comes to predicting the stock market’s direction, there are many factors to consider. 

Fundamentals matter. Is the economy expanding? Are earnings growing? How are profit margins looking?

So do valuations. Are stocks cheap? Expensive? Do the valuations make sense relative to fixed income yields? 

Technicals matter, too. Are we in an uptrend? Downtrend? Are the moving averages supporting the market or holding it down? 

And, of course, sentiment is important. Is everyone buying or selling? Is there too much greed? Fear? 

All those things matter. 

But arguably, when it comes to making informed stock market predictions, there is one thing that matters more than all those factors put together. And that is liquidity. 

Liquidity is a general measure of the amount of money flowing around in the economy. And this matters for the markets because the more money there is flowing around the U.S. economy, the more money investors have to buy stocks. And the more they buy those stocks, the higher stocks go.

You can think of liquidity as the overall stock “demand.” As is true with any asset, when demand for stocks goes up, stock prices tend to go up, too. 

And right now, our analysis suggests liquidity is about to surge higher in a way that is historically consistent with massive stock market gains. 

Market Liquidity Is Key to Stock Market Predictions

The best measure of liquidity in the U.S. economy is the Fed’s M2 money supply. That measures the value of all cash, checking deposits, and other types of currency that are readily convertible to cash, like CDs. It’s a measure of all the “near-term” money in the U.S. economy at any given point in time. 

M2 growth tends to cycle with the economy. When the economy is booming, the Fed usually takes money out of the economy via rate hikes to keep it from overheating. When the economy is struggling, the Fed will pump money into the economy via rate cuts to keep it from collapsing. 

Quantitatively, M2 growth tends to cycle between 0% and 20%. It has repeated this cycle for the past 70 years. 

Now let’s tie this back to stocks. 

Stocks tend to rise when liquidity rises. They also tend to soar when liquidity goes from shrinking to expanding. 

That is, whenever M2 growth cycles from falling to rising, the stock market pretty much always soars. 

This happened in 1966, 1970, 1974, 1995, 2005, 2010, and 2018. In each of those years, the Fed went from restricting the economy to supporting it. M2 growth went from falling to rising. And as a result, stocks soared. 

These “liquidity pivots,” if you will, are arguably the most important and predictive indicator of stock market direction. 

And our analysis suggests we are due for one such liquidity pivot this year. 

As we said earlier, M2 growth tends to cycle between 0% and 20%. Every time M2 growth drops into the 0% to 5% range, the Fed pivots, and M2 growth starts rising again. This is the “pivot zone” for M2. 

We fell to the bottom end of that “pivot zone” in early 2023. That is, M2 growth actually went negative for the first time ever. It dropped 1.3%. 

At these historically low levels, there is only path forward for M2 growth: higher. 

The Final Word

Given that inflation is falling and the economy is slowing, we think it is highly likely that the Fed goes from restricting the economy in 2022 to supporting it in 2023. This will create a major liquidity pivot. 

Previous major liquidity pivots have always sparked massive stock market rallies.

In other words, arguably the most important factor in stock market predictions will make a 180-degree turn over the next few months. As it does, the nasty bear market of 2022 will become a powerful new bull market in 2023. 

And in fact, we actually think this transition has already begun. 

Did you know that 139 stocks have already doubled this year? Or that 23 stocks have tripled and 11 have quadrupled? One has already risen more than 1,000%!

Yeah… that’s not bear market behavior. That many stocks don’t soar that much in that little time unless we’re entering a new bull market. 

So, I’d like to welcome you to what could be your best year ever as an investor – if you pick the right stocks for this new bull market breakout. 

Click here to learn more about the top stocks to buy for 2023.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.