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

The stock market’s second bull market anniversary they brought much cheer to Wall Street, with major indices like the Dow, S&P 500, and Nasdaq marking all-time highs. But while investor optimism abounds, history warns that market corrections and bear markets are natural parts of the economic cycle. Many investors turn to specific economic indicators to predict downturns, and one key indicator is flashing red: the U.S. M2 money supply.

To grasp the importance, let’s break down M2. M2 includes all the money in M1 (cash, coins, and quick-access checking accounts) plus savings accounts, money market accounts, and small certificates of deposit (CDs). These funds aren’t as instantly accessible as M1 money, making M2 a measure of money that’s somewhat tied up but still within reach. For nearly a century, M2 has consistently expanded to keep up with economic growth—until now. Between April 2022 and October 2023, M2 money supply saw a rare drop of 4.74% from its peak, marking the first notable decline since the Great Depression. This shift could mean less spending money for consumers, a crucial element for economic health.

Interestingly, the decline in M2 follows a pandemic-driven surge in money supply due to massive stimulus measures and ultra-low interest rates. Economists suggest this drop might just be a return to normal levels after an unprecedented expansion, yet a similar decline has historically signaled tough times for the economy. Over the past 150 years, each significant drop in M2 coincided with deep recessions and high unemployment rates. However, context matters—modern monetary tools and Federal Reserve strategies provide a buffer against such dramatic outcomes, unlike in previous eras.

Still, a contraction in M2 can pressure consumers to pull back on spending, which, in turn, could slow down economic growth and impact Wall Street. Bank of America data shows that many stock market downturns follow, rather than precede, official recessions. For long-term investors, however, patience remains a powerful ally. U.S. economic cycles reveal that while recessions can be brief, growth periods typically last for years. Since World War II, recessions rarely exceed 18 months, whereas expansions often span several years, sometimes a decade or more.

Even the stock market reflects this resilience. The S&P 500’s bull markets have historically outlasted bear markets by a significant margin, averaging 3.5 times the length of downturns. This data suggests that while volatility and downturns are inevitable, the overall trend points upward for those who hold steady……….[read more]

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In the age-old tug-of-war between consumers and economic policies, how might shifting consumer spending habits in response to tighter money supplies influence companies’ marketing strategies and product pricing decisions?

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