U.S. Money Supply Recently Did Something Not Observed Since the Great Depression — and It Historically Signals a Big Move in Stocks

But in those exceptionally rare instances throughout history where M2 money supply has notably declined from its all-time high, it has foreshadowed big-time trouble for the U.S. economy and stocks.

Based on the latest monthly report from the Board of Governors of the Federal Reserve, M2 money supply totaled $21.311 trillion in October 2024. This is down from a peak of $21.723 trillion in April 2022, which represents a decline of 1.89%.

Even more noteworthy, M2 tumbled by a maximum of 4.74% from April 2022 through October 2023. This marked the first year-over-year decline of at least 2% in M2 money supply since the depths of the Great Depression in 1933.

There are, of course, a couple of asterisks that need to accompany the above statements. For one, M2 money supply has climbed by 3.07% since hitting its nadir in October 2023. As noted earlier, rising money supply is normally indicative of a healthy economy.

And U.S. money supply skyrocketed during the pandemic. Fiscal stimulus led to M2 climbing by more than 26% on a year-over-year basis. This means the 4.74% peak-to-trough decline witnessed from April 2022 through October 2023 might be nothing more than a reversion to the mean after a historic increase.

Then again, history has been quite clear about what happens to the U.S. economy and stocks when M2 money supply meaningfully declines.

Although the data and chart you see above from Reventure Consulting CEO Nick Gerli is dated — it was posted on social media platform X in March 2023 — it perfectly illustrates how rare and unnerving year-over-year declines of at least 2% in M2 money supply have been throughout history.

Looking back to the start of 1870, there have been only five instances where M2 fell by 2% or more on a year-over-year basis: 1878, 1893, 1921, 1931-1933, and 2023. The four prior instances all correlate with periods of depression for the U.S. economy and double-digit unemployment. Though Wall Street and the U.S. economy aren’t tied at the hip, economic contractions are almost always associated with moves lower in the stock market.

But there are caveats to this data, as well. For instance, the Federal Reserve didn’t exist prior to December 1913. What’s more, the nation’s central bank and federal government are far more knowledgeable and have better tools at their disposal today to combat significant downturns than was the case in 1921 or during the Great Depression. In other words, double-digit unemployment and a depression would be highly unlikely today.

Nevertheless, a meaningful drop-off in M2 money supply does suggest consumers may be forced to pare back their discretionary purchases. This is often a key ingredient to an economic downturn taking shape.

Although history is quite clear that stocks don’t move up in a straight line, it’s important for investors to maintain perspective and recognize that history is a two-sided coin that undeniably favors those who are patient.

As an example, even though the central bank and federal government are considerably more knowledgeable now than they were a century ago about preventing economic downturns, recessions are still a normal and inevitable part of the economic cycle. No amount of well-wishing will stop an eventual contraction from occurring.

However, history has shown that recessions resolve quickly. Since the end of World War II in September 1945, nine out of 12 recessions resolved in under a year, while the remaining three failed to surpass 18 months in length. By comparison, a majority of economic expansions endured for many years, including two periods of growth that topped the 10-year mark.

Even though recessions are a normal part of the economic cycle, history has demonstrated that this cycle isn’t linear.

Bull and bear markets on Wall Street aren’t linear, either.

The data set you see above was released in June 2023 by the researchers at Bespoke Investment Group, shortly after the S&P 500 was confirmed to be in a new bull market. Bespoke calculated and compared the calendar-day length of every bear and bull market in the S&P 500 dating back to the start of the Great Depression in September 1929.

Altogether, the 27 bear markets the S&P 500 navigated its way through over 94 years stuck around for an average of 286 calendar days, or roughly 9.5 months. On the flip side, the 27 S&P 500 bull markets endured for 1,011 calendar days, or just a smidge above 3.5 times as long as bear markets.

Something else to note is that, including the current bull market, 14 out of 27 S&P 500 bull markets since the Great Depression have lasted longer than the lengthiest bear market (630 calendar days).

At any given time, there’s likely to be a forecasting tool or data point portending trouble for Wall Street. But with proper patience and perspective, even the gloomiest forecasts are no reason to worry.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

U.S. Money Supply Recently Did Something Not Observed Since the Great Depression — and It Historically Signals a Big Move in Stocks was originally published by The Motley Fool