April 16, 2024

News and Political Commentary

U.S. Money Supply Is Making History for the First Time Since the Great Depression, and It Implies a Big Move in Stocks Is on the Way

2 min read

Over lengthy periods, it’s tough to outpace equities in the return column. Compared to gold, oil, housing, and Treasury bonds, the annualized return of stocks trumps them all over the long run.

However, the predictability of directional moves in the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 (SNPINDEX: ^GSPC), and Nasdaq Composite (NASDAQINDEX: ^IXIC) gets thrown out the window when the time frame is narrowed. Since the start of 2020, these three indexes have traded off bear and bull markets in successive years.

A twenty dollar bill paper airplane that's crashed and crumpled into a financial newspaper. A twenty dollar bill paper airplane that's crashed and crumpled into a financial newspaper.

Image source: Getty Images.

Even though forecasting directional moves for the major indexes can’t be done with 100% accuracy, it doesn’t stop investors from trying to gain an edge. This is where a very select group of economic data points and predictive indicators comes into play. Though Wall Street offers no short-term guarantees, a couple of data points and indicators do have exceptional track records of correlating with moves higher or lower in the broader market.

One such data point that speaks volumes at the moment is U.S. money supply.

U.S. money supply hasn’t done this since 1933

Among the five money supply measures, two receive the bulk of the attention from economists and investors: M1 and M2. M1 factors in all the cash and coins in circulation, as well as demand deposits in a checking account. Think of M1 as cash that’s easily accessible and can be spent in the blink of an eye.

Meanwhile, M2 takes into account everything in M1 and adds in savings accounts, money market accounts, and certificates of deposit (CDs) below $100,000. M2 is still factoring in cash that consumers can spend, but it’s adding in capital that takes a bit more effort to get to. It’s this figure, M2, that is causing alarm in the investing world.

For well over a century, U.S. money supply has been rising with little interruption. Since a growing economy requires more cash and coins in circulation to complete transactions, rising money supply is something economists and…

2024-03-03 05:06:00

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