U.S. Money Supply Recently Did Something Last Witnessed During the Great Depression -- and It's Typically a Harbinger of a Big Move in Stocks

Yahoo

05-04-2025

For the better part of the last two-and-a-half years, optimists have been in firm control on Wall Street. Throughout 2024 and the first seven weeks of 2025, we witnessed the iconic Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and growth stock-focused Nasdaq Composite (NASDAQINDEX: ^IXIC) all rally to numerous record-closing highs.
However, the last six weeks have served as a necessary reminder that stocks can, and will, move in both directions.
Investors are constantly on the lookout for forecasting tools and correlative measures that can accurately predict short-term directional moves in the Dow, S&P 500, and Nasdaq Composite. While no perfect indicator exists, a small number of metrics and events have, throughout history, strongly correlated with moves higher or lower in Wall Street's major stock indexes.
One of these fairly uncommon events, which occurred two years ago, appears to be a harbinger of a massive move to come in stocks.
Among the laundry list of economic data points announced monthly, perhaps none was more of an eyebrow-raiser in 2023 than the U.S. money supply.
Although there are five different measures of money supply in the U.S., M1 and M2 garner the most attention. The former is a measure of cash and coins in circulation and demand deposits in a checking account. It's effectively money that can be spent at a moment's notice.
Meanwhile, M2 factors in everything found in M1 and adds in savings accounts, money market accounts, and certificates of deposit (CDs) below $100,000. It's still money you can spend, but it's not accessible at the proverbial drop of a dime. It's this category that made history recently.
Under normal circumstances, M2 slopes up and to the right. This means that the money supply has steadily increased for decades, with nothing more than mini-declines of 0.01% to 1.5% from its all-time high along the way. Growing economies need more capital in circulation to facilitate transactions.
But in those extremely rare instances where the money supply has notably declined over the last 155 years, it's been a flawless precursor to trouble for the economy and Wall Street.
According to data from the Board of Governors of the Federal Reserve System, the U.S. M2 money supply clocked in at $21.671 trillion in February 2025. Superficially, this represents a very modest decline of 0.24% from its all-time high of $21.723 trillion set in April 2022.
But take note of the substantial spike lower in 2022 and 2023. Between April 2022 and the trough in October 2023, M2 declined by 4.74%. This marked the first time since the Great Depression that M2 fell by at least 2% on a year-over-year basis.
If there's a silver lining in this data, it's that M2 money supply has returned to growth since October 2023. Almost the entirety of the 4.74% retracement has been done away with.
Additionally, the U.S. money supply expanded by more than 26% on a year-over-year basis during the height of the COVID-19 pandemic. M2 has never expanded this quickly before, so there's a real possibility that a 4.74% decline following a historic expansion of money supply is nothing to worry about.
But history isn't on the U.S. economy's or Wall Street's side when M2 endures a notable move lower.
The post you see above from Reventure Consulting CEO Nick Gerli is more than two years old. It doesn't capture the 4.74% peak decline in October 2023, nor does it depict the bounce back in money supply since then. But what it does show is a very clear correlation between big dips in M2 money supply and poor performance for the U.S. economy/stock market over 155 years.
Since 1870, there have been only five instances where M2 declined by at least 2% on a year-over-year basis: 1878, 1893, 1921, 1931-1933, and 2023. The four previous instances are all associated with periods of economic depression for the U.S. economy and double-digit unemployment rates.
Once again, the good news is that the existence of the Federal Reserve, along with the know-how regarding how best to implement monetary policy to benefit the U.S. economy, makes it extremely unlikely that the U.S. would enter a depression.
However, the first notable decline in M2 since the Great Depression does suggest that consumer buying habits have been pressured, which heightens the possibility of a recession taking shape. Historically, recessions weigh on equities and push the Dow Jones, S&P 500, and Nasdaq Composite significantly lower.
Although recessions and stock market downturns aren't something working Americans or investors look forward to, they're a normal and inevitable part of economic and investing cycles. Thankfully, correlations work in both directions -- and being an optimist has been a statistically smarter move for investors for more than a century.
Regardless of the policies instituted by the federal government and central bank, recessions are going to occur from time to time. Yet, since the end of World War II, the average recession has endured for just 10 months.
On the other hand, the typical economic expansion over the last 80 years has stuck around for approximately five years. This includes two periods of growth that surpassed the 10-year mark. Wagering on the U.S. economy to grow over time has been a financially sound move.
It's a similar story for Wall Street, with bull and bear markets looking nothing like one another.
Shortly after the S&P 500 entered a new bull market in June 2023, the analysts at Bespoke Investment Group published a data set on social media platform X that compared the length of bull and bear markets dating back to the start of the Great Depression (September 1929).
Out of the 27 bear markets that have occurred during a nearly 94-year stretch, the average 20%+ downturn lasted just 286 calendar days, or 9.5 months. Further, no bear market has endured for more than 630 calendar days.
In comparison, the average bull market has lasted 1,011 calendar days since the Great Depression began, which is 3.5 times longer than the typical bear market. If the current bull market is extrapolated to the present day, 14 out of 27 S&P 500 bull markets have endured longer than the lengthiest bear market.
Even if investors have no idea when stock market corrections will begin, how long they'll last, or how steep the ultimate decline will be, Bespoke's data set pretty conclusively demonstrates that optimism is the necessary ingredient for long-term success in the stock market.
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U.S. Money Supply Recently Did Something Last Witnessed During the Great Depression -- and It's Typically a Harbinger of a Big Move in Stocks was originally published by The Motley Fool