Unexpected Impact: Government's Fiscal Policy and Money-Supply Surge Bolster US Stocks in 2023

In a recent update, Morgan Stanley's Chief Investment Strategist, Mike Wilson, shed light on the significant role that "excessive" government fiscal policy and robust money-supply expansion have played in shaping the current state of U.S. stocks in 2023. Wilson, whose past market predictions have been at odds with unfolding realities this year, highlighted the unforeseen influence of these factors on the economy and markets.

Wilson emphasized that the scale of government spending has emerged as a pivotal driver in bolstering both the U.S. economy and the stock markets, a phenomenon his team had not fully accounted for in their earlier forecasts. He acknowledged the substantial fiscal impulse that has been injected into the economy and how it has contributed to market dynamics, stating,

"Part of the reason we’ve found ourselves offside this year is that the fiscal impulse returned with a vengeance and remained quite strong in 2023 – something we didn't factor into our forecasts."

A revealing chart shared by Wilson underscores the marked contrast between fiscal spending and the U.S. unemployment rate, which, according to recent data from the Department of Labor, dipped to a low of 3.5% in July. This unexpected correlation underscores the influence of government action on the economic landscape.

While Wilson was among the few to accurately anticipate the inflation-driven market decline witnessed last year, his predictions for 2023 took a different course. Initially, he envisaged a downtrend in stocks during the first half of the year. However, despite a powerful rally propelled by the surge in artificial intelligence investments and the persistent resilience of the U.S. economy, Wilson has admitted to misjudgments in his bearish view. He's now open to the prospect of the rally's continuation, acknowledging the potential for further government spending until the next debt ceiling assessment in 2025.

Recent warnings from Fitch Ratings, which downgraded the U.S. credit rating from AAA, echo the concerns about ballooning budget deficits linked to excessive government spending. This decision highlights the broader repercussions of the ongoing fiscal policy measures that have underpinned the U.S. economy's unexpected trajectory in 2023.

In tandem with these developments, the S&P 500 has demonstrated a remarkable upswing, recording a nearly 20% year-to-date increase. Meanwhile, the Nasdaq 100 has surged by approximately 35% year-to-date, underscoring the buoyant market sentiments in the face of evolving fiscal policies and monetary dynamics.