In the last four years, Wall Street has been a rollercoaster of volatility, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite oscillating between bear and bull markets. While investors seek predictive indicators, the complexity of stock movements remains elusive. However, a notable anomaly in the U.S. money supply is catching attention, hinting at potential stock market shifts.
The U.S. money supply, a critical economic measure, is exhibiting an unprecedented trend not seen in over 90 years. Despite various metrics, economists and investors primarily focus on M1 and M2. M1 encompasses cash, coins, and demand deposits, while M2 includes savings accounts and CDs. Typically, money supply grows steadily to accommodate economic transactions, but rare declines signal trouble.
Based on data from the Federal Reserve, the M2 money supply peaked in July 2022 at $21.7 trillion and has since declined to approximately $20.87 trillion by December 2023, marking the first significant drop since the Great Depression. Though seemingly marginal, historical analysis reveals that M2 retracements of at least 2% have historically foreshadowed economic downturns.
The current decline in M2, coupled with persistent inflation, could lead to reduced consumer spending and a potential recession, historically reflected in stock market downturns. Commercial bank credit, another crucial metric, has also experienced a notable drop, indicating tightened lending standards, which could stifle business growth and innovation, further exacerbating economic concerns.
While historical patterns suggest impending challenges for the U.S. economy and stock market, long-term investors may find solace in past recoveries. Despite the inevitable cyclicality of markets, history demonstrates that economic downturns are short-lived, often followed by prolonged periods of expansion.
Although uncertainties loom over the stock market’s trajectory in 2024, understanding historical patterns and economic indicators can guide investors through turbulent times. While recessions may bring short-term challenges, adopting a long-term investment approach, akin to Warren Buffett’s philosophy, could yield favorable outcomes amidst market fluctuations.
