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U.S. Money Supply Recently Did Something That Hasn’t Occurred Since the Great Depression — and It May Foreshadow Trouble for Wall Street

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On Oct. 12, Wall Street celebrated the two-year anniversary of the current bull market. Optimism among investors has been readily apparent, with the ageless Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and growth-powered Nasdaq Composite (NASDAQINDEX: ^IXIC) reaching multiple all-time highs.

But if history has taught us anything, it’s that stock market corrections and bear markets are normal and inevitable. Although no predictive metric is 100% accurate in forecasting directional moves lower in the Dow Jones, S&P 500, and Nasdaq Composite, there are a small number of events and data points that have strongly correlated with weakness in stocks throughout history. These events and data points are the ones that investors sometimes look to in order to gain an advantage.

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One of these highly correlative forecasting metrics, which has an immaculate history of predicting U.S. economic downturns dating back more than 150 years, is foreshadowing trouble for Wall Street.

A twenty dollar bill paper airplane that's crashed and crumpled into the business section of a newspaper.
Image source: Getty Images.

The one predictive tool that should be raising eyebrows within the investment community is U.S. money supply.

While there are a number of ways to measure money supply, the two with the greatest relevance are M1 and M2. M1 factors in all cash and coins in circulation, travelers’ checks, and demand deposits found in a checking account. This is money that can be spent by consumers at a moment’s notice.

On the other hand, M2 takes everything found in M1 and adds in savings accounts, money market accounts, and certificates of deposit (CDs) under $100,000. This is still money consumers can access, but it requires more time and effort to get to before it can be spent. It’s this measure of money supply that is raising red flags.

Economists more or less ignored M2 money supply for the overwhelming majority of the last 90 years because it had been expanding without fail. A steadily growing economy needs more capital in circulation to facilitate transactions.

But in those very rare instances throughout history where notable declines in M2 money supply have occurred, it has spelled trouble for the U.S. economy and Wall Street.

US M2 Money Supply Chart
US M2 Money Supply Chart

M2 is reported monthly by the Board of Governors of the Federal Reserve System. In April 2022, it hit an all-time high of $21.723 trillion. But between April 2022 and October 2023, U.S. M2 money supply would decline by a peak of 4.74% from this record high.

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