U.S. Money Supply Is Doing Something It Hasn't Done in 90 Years, and It May Signal a Big Move for Stocks
http://www.fool.com/investing/2023/04/30/money-supply-90-years-signal-big-move-for-stocks/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article
Apr 30, 2023
The first decline in M2 money supply since 1933 may portend trouble for Wall Street.
For the past 16 months, professional and everyday investors alike have been taken for quite the ride. The ageless Dow Jones Industrial Average (^DJI 0.80%), broad-based S&P 500 (^GSPC 0.83%), and growth-driven Nasdaq Composite (^IXIC 0.69%) all entered respective bear markets and produced their worst full-year returns (in 2022) since the Great Recession.
Even though stock market corrections, and to some extent bear markets, are a common occurrence on Wall Street, these events still have a tendency to incite fear and panic among investors. More specifically, they leave everyday investors wondering when the bear market downturn will end.
To be crystal clear, there isn't a metric, indicator, or tool that can predict with concrete accuracy when a bear market will begin, how long it'll last, or how steep the decline will be. There are, however, plenty of tools we can use to swing the odds in our favor as investors so we know what to expect moving forward.
One of those tools is the U.S. money supply, which is portending something big for the stock market.
M2 money supply hasn't done this since 1933, and investors should take note
Though there are a couple of money supply measures, the two most investors and economists focus on are M1 and M2. M1 factors in the cash and coins currently in circulation, along with things like traveler's checks. It's easily accessible money that can be spent immediately. Meanwhile, M2 takes into account everything in M1, as well as savings accounts, money market funds, and certificates of deposit (CD) of less than $100,000. In other words, it's money people can get to, but it takes a little extra work.
This latter measure, M2, is where we're seeing something truly historic at the moment.
>>> Thru March, M2 money supply -4.1% year/year, decisively worst rate back to at least 1960s
As you can see in the tweet from Charles Schwab Chief Investment Strategist Liz Ann Sonders, U.S. M2 money supply through March has fallen 4.1% on a year-over-year basis.
Declining money supply in combination with above-average inflation is generally bad news for the U.S. economy. If the cost for goods and services keeps climbing at an above-average pace, and there are fewer dollars and coins in circulation to pay for these goods and services, something typically breaks, leading to a period of deflation and an economic downturn.
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Mad Poet Strikes Again.
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