U.S. Money Supply Decline Sparks Warnings for Investors

A recent report highlights the decline in U.S. M2 money supply, raising concerns about potential market corrections and economic weakness. Historically, such declines correlate with recessions, increasing urgency for investors to reassess their positions.

Date: 05-10-2024

AI Rating: 4

The report underscores a significant trend in the U.S. M2 money supply, which has posted its first notable decline in over 90 years. As of October 2023, M2 is reported to be 2.52% below its peak of $21.722 trillion recorded in April 2022. This downturn is particularly alarming as it correlates historically with periods of economic downturn.

Specifically, the report notes that the last time the money supply saw a year-over-year decline of at least 2% was during the Great Depression, indicating a potentially dire economic landscape ahead. The M2 money supply had an unprecedented peak during the COVID-19 pandemic, which fed into the post-pandemic struggles now facing the financial markets.

The decline in M2 money supply, which includes various liquid assets, points towards reduced consumer spending capability, which historically previews an economic downturn. Consumers may begin to limit discretionary purchases due to lesser available capital, precipitating broader economic consequences.

While M2 has shown signs of recovery with some growth on a year-over-year basis, the 2.52% drop from its previous peak still signals caution among market participants. The traditional forecasting tool referenced in the report outlines that investors should brace for volatility, as notable contractions in M2 have led to significant corrections in equity markets in the past.

Furthermore, the analysis draws attention to the predictive nature of the M2 reduction, suggesting potential upcoming dips in stock valuations, as corporate earnings typically correlate with a growing economy. The reference to Bank of America’s study that suggests two-thirds of the S&P 500's drawdowns occur during economic contractions intensifies the caution advised in the report.

Ultimately, while long-term investors might find solace in periods of recovery following corrections, the immediate context depicted in the report emphasizes grains of pessimism about economic resilience moving forward, rooted in the recent trends of the M2 money supply.

Stocks: ^DJI ^GSPC ^IXIC