Over the past four years, Wall Street has experienced volatility, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite trading between bear and bull markets. While predicting market movements is difficult, certain economic indicators and metrics can provide insights into potential shifts. One such indicator is the U.S. money supply, particularly the M2 money supply, which includes easily accessible funds such as cash, coins, and deposits in checking accounts, as well as savings accounts and CDs. The recent decline in the M2 money supply has raised concerns about the U.S. economy and Wall Street.
Historically, declines in the M2 money supply have been rare and have been followed by negative outcomes for the U.S. economy and stock market. The current decline in the M2 money supply represents the first significant decrease since the Great Depression, following a period of expansion during the COVID-19 pandemic. While the recent increase in the money supply suggests a growing economy, the historical data indicates that recessions may be on the horizon if the trend continues.
Data analysis by Reventure Consulting CEO Nick Gerli shows that significant declines in the M2 money supply have been associated with depressions and high unemployment rates throughout history. While the likelihood of a depression with double-digit unemployment rates in the current economic landscape is low, historical trends suggest that a decline in the money supply could lead to a recession and a subsequent decline in the stock market. This data serves as a warning for investors looking to navigate the current economic climate.
Despite the potential challenges posed by the declining M2 money supply, historical perspective shows that recessions are a normal part of the economic cycle and are typically short-lived. Long-term investors who maintain patience and optimism have historically benefited from periods of economic growth that followed recessions. Data from Bespoke Investment Group highlights the resilience of the stock market over time, with bull markets lasting longer than bear markets, reinforcing the idea that long-term thinking is essential for success on Wall Street.
The Motley Fool highlights the importance of seizing opportunities in the stock market, particularly when expert analysts issue “Double Down” recommendations for companies poised for growth. By investing strategically in promising stocks, investors can capitalize on potential gains over the long term. While market volatility and economic indicators may raise concerns, historical trends suggest that the Dow Jones, S&P 500, and Nasdaq Composite will continue to rise over time, along with the broader U.S. economy.
