6 months ago
39
For the better part of two years, the bulls have been running wild on Wall Street. In 2024 alone, the iconic Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and innovation-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) all soared to multiple record-closing highs.
But if history teaches investors anything, it's that the stock market rarely moves up or down in a straight line. Though there's no such thing as a forecasting tool that can, with 100% accuracy, concretely tell the future and accurately predict short-term directional moves in the Dow Jones, S&P 500, and Nasdaq Composite, it doesn't stop investors from trying to gain an edge.
One such predictive tool, which thus far, has a perfect track record of correlating with sizable moves in the stock market spanning more than a century, is currently portending a massive move to come in equities.
U.S. M2 money supply did something no one has witnessed in 90 years
The forecasting tool in question that has a flawless track record when back-tested back to 1870 is U.S. money supply.
While there are five different measures of money supply, economists tend to focus on M1 and M2. The former comprises cash and coins in circulation, as well as demand deposits in a checking account. In short, it's money you can immediately access and spend.
Meanwhile, M2 takes into account everything you'd find in M1 and adds in savings accounts, money market accounts, and certificates of deposit (CDs) below $100,000. This is still money consumers can access and spend, but it requires a little more work to get to. It's also the money supply measure that's been blaring a warning for Wall Street.
With few exceptions, M2 money supply slopes up and to the right. This is a fancy way of saying that the amount of capital in circulation tends to increase over time, which is normal and expected, given that the U.S. economy is growing at a relatively steady pace over the long run.
But in those rare instances over the last 154 years when M2 money supply has notably declined, it's been a look-out-below moment for the U.S. economy and stock market.
U.S. M2 money supply is reported monthly by the Board of Governors of the Federal Reserve and peaked at $21.722 trillion in April 2022. As of the latest report for August 2024, M2 stood at $21.175 trillion, which is down 2.52% from its all-time high. Last year marked the first year-over-year decline in M2 money supply of at least 2% since the Great Depression.
But as you'll note from the chart, M2 money supply is once again rising on a year-over-year basis. Despite M2 declining by a peak of 4.74%, as of October 2023, this drop has been nearly halved in less than a year.
