If person A buys a share for $1, then another person must sell a share for $1.
A year later, if person A sells a share for $10, then another person must buy a share for $10.
At all times, someone is always holding the money created by the Fed. The money never "went in" to stocks. Sure, the valuation of the stocks changed, but the aggregate money supply and the aggregate stock ownership never changed.
The money supply is constantly changed by the Fed in response to demand for cash, to maintain consistent inflation.
In 2008 when everyone started selling their stocks, the Fed had to create massive amounts of money to match the appreciation of the stocks that were being sold. Thus, because the money supply grew in that situation, people said money was "coming out of" stocks. In reality it was value coming out of stocks, and the money was being created by the Fed. So think of it as shorthand for what's really happening.
Ah, but you're committing the very same fallacy! It's not possible that "everyone started selling their stocks" in 2008. That statement makes zero logical sense. Every seller was matched by a buyer. We might just as well say that everyone starting buying stocks in 2008.
I think what often links stock prices with demand for money is risk preferences. If stocks become more volatile (which they tend to do while falling), investors deleverage. This deleveraging reduces the velocity of money and thereby increases the demand for cash. If unchecked, this will cause deflation and requires the Fed to create more money in response.
Every seller was matched by a buyer but not at the same price. If a stock starts selling at $100/share and after 1,000,000 transactions is selling at $50/share, then some money came out of the stock despite the number of shares not changing.
Every seller is matched by a buyer at the same price!
I think you are making claims without thinking them all the way through. Let's go through an example:
Imagine there is a company with 1,000 shares. Alice buys a share from Bob for $100. This trade implicitly values the company at $100,000. Later, Carol buys a share from Dave for $50. This new trade implicitly values the company at $50,000.
The value of the company fluctuated by $50,000, but if you look at every trade, an equal number of dollars and shares were exchanged on each side. Alice lost $100 of money while Bob gained $100 of money. Carol lost $50 of money while Dave gained $50 of money.
No money "came out" of the stock.
The aggregate stock ownership stayed the same: 1,000 shares were owned both before and after.
The aggregate money supply stayed the same: $150 were in people's pockets both before and after.
The only thing that changed was the market consensus of the price of the company. The bottom line is that price changes of an asset class don't mean money is being soaked or released. Individual ownership can change, but aggregate ownership cannot.
Does that sound reasonable? I hope this conversation is helpful for people reading this comment thread.
"It's impossible for extra money to end up invested in stocks in aggregate, because for every buyer there must be a seller."
If I buy a share for $1, and then a year later sell it for $10, then the new buyer is putting $9 extra dollars into that asset class.