There's a way to predict the S&P 500 with an 85% correlation!

Did you know there's a way to predict the S&P 500 with an ~85% correlation?

Sounds insane, but it's true.

Here's the surprising logic behind my claim:

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When investors look for long-term bullish S&P 500 signals, they look at:

U.S CPI

U.S. interest rates

U.S. M2 supply (relatively liquid assets in the U.S economy)

This is a mistake.

Although these metrics matter, there's something we commonly forget.

Unlike most countries, the U.S. stock market is global.

German citizens rarely invest in Japanese stocks.

But many will invest in Nvidia, Apple, Microsoft, etc.

When central banks print money, it enters the economy of that respective country.

A portion of that money goes to citizens who buy food, shelter, clothing, etc.

However, some of them will invest their cash into assets.

A sizable portion specifically goes into the S&P or S&P-included companies.

That's why, if you're investing in the S&P, you can't just focus on U.S. liquidity.

You need to focus on global liquidity instead.

The problem is global liquidity is hard to measure.

Combining M2 and interest rate data from the world's central banks isn't easy.

That's why financial data platforms like Ycharts and TradingView don't have a global liquidity metric.

This is why investors typically track GL from the 5 biggest central banks.

Specifically the:

Bank of Japan

Federal Reserve

Bank of England

European Central Bank

People's Bank of China

These are the most important central banks in the world, and tracking their efforts isn't difficult.

This is where most investors go wrong, when they exclusively track the Fed's monetary policies to predict the S&P's long-term outlook.

But the S&P receives inflows from across the globe.

That's why the decisions of the BoJ, BoE, ECB, and PBoC collectively matter more than the Federal Reserve alone.

Thanks to the U.S. stock market’s global status, global liquidity is highly correlated.

Popular U.S. stock indexes like the NASDAQ, for example, have a 95% correlation.

Whereas the S&P has an ~85% correlation.

This chart speaks volumes.

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However, during bull markets, global liquidity sometimes decouples from the S&P.

Particularly when there's particularly bullish news and the market gets excited.

Trump's election victory was a great example of this.

Politics aside, Trump has always been bullish for stocks.

The same can be said about bearish black swan events.

2008, the initial COVID scare, Yen carry trade, Deepseek, etc.

Bullish and bearish signals decouple the market from global liquidity.

But it always realigns.

It's important to remember that there's a delay between global liquidity and the stock market.

It takes time for liquidity to flow into assets and inflate prices.

Liquidity ? stocks ? fewer shares ? lower supply ? prices rise

What's the moral of the story?

Don't just analyze U.S. monetary policies.

Monitor the policies of the biggest central banks in the world.

With a delay, you can reliably predict the movements of major U.S. indexes.

**

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