A century-long trend in the US money supply is flashing a warning signal to investors. Despite the Dow Jones, S&P 500, and Nasdaq Composite reaching record highs in 2024, history suggests that the stock market rarely moves in a straight line. One predictive tool that has a perfect track record of correlating with significant market moves is the US money supply, specifically the M2 measure.
M2 money supply, which includes cash, coins, demand deposits, savings accounts, and certificates of deposit, has been declining since April 2022, with a peak drop of 4.74%. Although it has started to rise again, the decline is still 2.52% below its all-time high. This rare occurrence has only happened five times in the last 150 years, with each instance preceding a period of depression and double-digit unemployment.
While it’s unlikely that a depression will occur today, given the knowledge and monetary tools available, the decline in M2 money supply suggests that consumers may need to cut back on discretionary spending, leading to economic weakness or even a recession. Historical data shows that around two-thirds of the S&P 500’s peak-to-trough drawdowns occur during recessions.
However, investors with a long-term mindset can take comfort in the fact that recessions are a normal part of the economic cycle and tend to resolve quickly. Since World War II, there have been 12 recessions in the US, with most lasting less than 12 months. In contrast, periods of growth have lasted multiple years, with two economic expansions reaching the 10-year mark.
Maintaining perspective and being optimistic is a winning formula on Wall Street. Despite the uncertainty surrounding stock market corrections, history shows that bull markets tend to last longer than bear markets. By focusing on the long-term trend, investors can ride out market fluctuations and come out ahead.
Leave a Reply