If you’re looking to invest and get, over a lengthy period of time, a super solid return, you can’t go wrong with the stock market. While gold, oil, housing, and other asset classes have managed to make more than a few people some serious cash, they don’t even come close to the kind of annualized average returns that stocks have brought in over the last 100 years.
However, when you start to narrow things down and look at a short period of just a few years and take a crack at predicting the directional moves of the Dow Jones Industrial Average, the S&P 500, and the Nasdaq, with any sort of sustained accuracy, you soon realize that it’s almost nigh unto impossible.
Do you think that stops investors from attempting to do what the rest say cannot be done? Nope. Not at all. While no economic data point or indicator exists that can give you a 100 percent guarantee on predictions about what direction the Dow, S&P 500, or Nasdaq will go next, there are some forecasting tools and a group of metrics that can be used that have managed to strongly correlate with moves higher and lower in the major indexes throughout history.
One such metric, which is currently forecasting a huge move in stocks, is the U.S. money supply. Which it seems the folks in the Fed are determined to destroy by just printing fat stacks of cash and introducing them into the supply. That’s a story for another time.
Here’s more on this from the Motley Fool:
Among the five measures of money supply, M1 and M2 tend to garner most of the focus from economists and the investing community. M1 is a measure of cash and coins in circulation, as well as demand deposits in a checking account. It’s money you have easy access to that can be spent immediately.
On the other hand, M2 money supply accounts for everything in M1 and also adds in savings accounts, money market accounts, and certificates of deposit (CDs) below $100,000. This is still money you can access, but you’ll have to work a bit harder to get to it. This is also the money supply metric that’s raising eyebrows right now for all the wrong reasons.
Most economists and investors tend to pay very little attention to M2 money supply because it’s grown with such consistency over time. Since the U.S. economy expands over long periods, it’s only natural that more cash and coins are needed to complete transactions.
However, in those very rare instances where there is a fairly sizable contraction in the M2 money supply, bad things have followed on its heels in the U.S. economy and the stock market. In other words, contractions in the money supply are bad juju. Very, very bad juju. The kind that gives you goosebumps and makes your skin crawl.
In March 2022, the M2 money supply hit $21.71 trillion. New monthly data released by the Board of Governors of the Federal Reserve System has revealed that the money supply is now sitting at around $20.78 trillion. This information was discovered in February 2024.
To provide you with a little context, this is the first truly meaningful move lower we’ve seen in the M2 since the Great Depression. That is not an omen that bodes well for the future, folks.
In one respect, this 4.29% retracement in U.S. money supply may simply be a reversion to the mean after M2 expanded by a historic 26% on a year-over-year basis during the height of the COVID-19 pandemic. Multiple rounds of fiscal stimulus flooded the U.S. economy with cash and consumers who were more than willing to spend it.
On the other hand, more than 150 years’ worth of history has been pretty clear about what happens when M2 money supply retraces by more than 2% from a record high.
Last year, Reventure Consulting CEO Nick Gerli shared the post you see below on X (the platform formerly known as Twitter). Gerli leaned on data from the U.S. Census Bureau and Federal Reserve to track M2 movements since 1870.
WARNING: the Money Supply is officially contracting. 📉
This has only happened 4 previous times in last 150 years.
Each time a Depression with double-digit unemployment rates followed. 😬 pic.twitter.com/j3FE532oac
— Nick Gerli (@nickgerli1) March 8, 2023
“Gerli noted five instances where M2 money supply declined by at least 2% on a year-over-year basis, including the significant year-over-year move lower observed in 2023. The previous four instances where M2 fell by at least 2% — 1878, 1893, 1921, and 1931-1933 — were associated with periods of depression and high unemployment for the U.S. economy,” the Fool said in the article.
In order to provide an evaluation of this data properly, it must be pointed out that the country’s central bank didn’t come into existence until sometime between 1878 and 1893. Not to mention both monetary and fiscal policy in the United States has made significant progress since the days of the Great Depression. The chances we could see another depression is very low thanks to the tools we have available today.
But this data set is pretty clear: If the amount of cash accessible to consumers is declining, and the prevailing/core rate of inflation is at or above historic norms, there’s a good chance consumers will pare back discretionary purchases. In short, it’s a historic blueprint for a U.S. recession.
While stocks certainly don’t move in tandem with the overall health of our economy, if we were to head into another recession it would most definitely negatively impact corporate earnings. If you examine the history of the stock market, you’ll see that the vast majority of drawdowns in the S&P 500 have happened after a recession is declared.
“Considering how resilient the U.S. economy has been in the face of rapidly rising interest rates, the prospect of the Dow Jones, S&P 500, and Nasdaq Composite being knocked off of their respective pedestals may not be something you want to hear or talk about. Thankfully, history is a two-way street that very much favors investors who can take a step back and appreciate the power of perspective,” the Motley Fool article said.
The piece then explained, “As an example, let’s take a closer look at the course most economic cycles have taken. Although recessions are perfectly normal and inevitable, they’ve historically come and gone in the blink of an eye. Since the end of World War II in September 1945, only three of 12 U.S. recessions lasted at least 12 months. Further, none of the remaining three surpassed 18 months.”
Expansions typically endure over the course of multiple years, with only a few exceptions. There have been two specific periods of growth since the middle of the 40s that went over the 10-year mark. While recessions suck in the short term, they often give way to much lengthier periods of economic and corporate growth.
It’s much the same story when it comes to Wall Street. Data from market research company Yardeni Research shows there have been 40 separate double-digit percentage declines in the S&P 500 since the start of 1950. Even though we’re never going to precisely know ahead of time when these downturns will start, how long they’ll last, or how steep the decline will be, history shows that the S&P 500, Dow, and Nasdaq Composite eventually recoup their losses and push to new highs.
It's official. A new bull market is confirmed.
The S&P 500 is now up 20% from its 10/12/22 closing low. The prior bear market saw the index fall 25.4% over 282 days.
Read more at https://t.co/H4p1RcpfIn. pic.twitter.com/tnRz1wdonp
— Bespoke (@bespokeinvest) June 8, 2023
In June 2023, Bespoke Investment Group, which is a market insights company, went even farther and published a set of data concerning how off kilter bull markets have tended to be relative to bear markets within the S&P 500, according to The Motley Fool.
The Fool then goes on to reveal that researchers working for the company poured over close to 94 years worth of bear and bull markets in the index, kicking things off with the Great Depression, which started in 1929. The data showed that the 27 bear markets were noted to have lasted an average of 286 days, which is a little over 9 months, the 27 bull markets in the S&P 500 actually stuck around much longer at around 1,011 days, or two years and nine months. That’s approximately 3.5 times longer.
To add to the above, the longest bear market in the S&P 500’s history was just 630 calendar days (Jan. 11, 1973 – Oct. 3, 1974), by Bespoke’s measure. Comparatively, 13 of the 27 S&P 500 bull markets were longer than the lengthiest bear market.
Things might look awful in the short term, but as the Rolling Stones once said, “Time is on my side,” especially if you’re an investor. Even with a lower M2 money supply, given the trend of things looking just fine over a longer period of time should soothe your concerns.
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