Rare Money Supply Shift Since the Great Depression Signals Potential Market Turbulence

Wall Street Volatility and the Shrinking Money Supply

Wall Street has been volatile in recent years, with the major indexes fluctuating between bear and bull markets since 2020. Although it's impossible to predict short-term market movements, certain economic indicators may offer clues about future trends.

One such indicator is the U.S. money supply. While there are different ways to measure it, the M2 metric (including cash, checking accounts, and easily accessible savings deposits) is currently attracting attention.

A Rare and Concerning Decline

The M2 money supply has been rising steadily for decades. However, it peaked in April 2022 and has since declined by over 4%. This is the first decline of this magnitude since the Great Depression, a historically troubling sign.

During past instances of significant M2 declines, the U.S. economy entered a depression. While a repeat of that severity is unlikely today due to a better understanding of economic policy, a recession could be on the horizon. Less money in circulation could mean reduced consumer spending, negatively impacting the economy and the stock market.

History Offers Perspective

It's important to remember that recessions, while unpleasant, are a normal part of economic cycles and are typically short-lived. History shows that bull markets generally last much longer than bear markets, and the U.S. economy tends to grow over time.

While the M2 decline raises concerns, a long-term perspective suggests that the Dow Jones, S&P 500, and Nasdaq Composite have the potential for significant gains in the future.

Key Takeaways

• Recent market volatility may continue in the short term.

• The shrinking M2 money supply is a potential warning sign for the economy.

• Investors should be prepared for a possible recession.

• Despite short-term challenges, history favors long-term optimism in the stock market.