M2-Money Supply?

This is a first for the U.S. money supply in more than 90 years.

The forecasting metric I've alluded to above is the U.S. money supply. Though the U.S. money supply has five different measures, the two with the most merit tend to be M1 and M2.

M1 money supply takes into account cash and coins in circulation, as well as demand deposits in a checking account. Think of it as money that's very accessible and can be spent at the drop of a hat.

Meanwhile, M2 factors in everything in M1 and adds in savings accounts, money market accounts, and certificates of deposit (CDs) under $100,000. It's still money that's accessible, but it takes a bit more work to get to and spend. It's this category, M2 money supply, which is cause for concern.

Normally, little attention is paid to M2 money supply. That's because it's been rising with virtually no interruption for the last nine decades. With the U.S. economy growing over time, it's not surprising that more capital has been needed to facilitate transactions.

What's abnormal is a decline in the U.S. money supply -- which is exactly what we're witnessing right now with M2.

In April 2022, the Board of Governors of the Federal Reserve reported that M2 peaked at an all-time high of $21.722 trillion. For some context, that's up from $286.6 billion in January 1959 and represents a compound annual growth rate of approximately 7%.

But as of April 2024, M2 came in at $20.867 trillion, representing a decline of nearly $855 billion -- 3.94% on a percentage basis -- in two years. It's the first time M2 money supply has backed off more than 2% from its all-time high since the Great Depression.

The stipulation to this decline that shouldn't be overlooked is that M2 exploded higher by 26% on a year-over-year basis during the height of the COVID-19 pandemic. Multiple rounds of fiscal stimulus from the federal government, coupled with low interest rates, flooded the U.S. economy with capital that rapidly expanded the money supply. An argument can be made that the nearly 4% retracement in M2 over the last two years is nothing more than a normalization after a historic expansion.

I'll also point out that M2 has actually risen on a year-over-year basis. Despite being down 3.94% from its all-time high in April 2022, M2 is higher by a very modest 0.14% from where things stood one year ago.

Nevertheless, history has been quite clear about what happens anytime the M2 money supply retraces by at least 2% from its high -- and it's not good news for Wall Street or the U.S. economy. May, 2024.

M2-Money Supply

Continued growth in the M2 money supply is a bullish indicator for risk assets as it indicates more liquidity is entering the system, which typically finds itself in risk-assets first.

The M2 money supply influences CPI by affecting inflation trends. While the Federal Reserve is actively tightening through quantitative easing and keeping the Fed funds rate at an elevated level while trying to bring CPI back down to its 2% inflation target, the M2 money supply continues to grow.

The M2 money supply measures the total amount of money in circulation within an economy, including both liquid and less liquid assets. Meanwhile, the CPI index tracks the average price change of goods and services over time, which indicates inflation.

The M2 money supply is a broad measure of the total money circulating in the economy. It includes highly liquid assets like cash and checking deposits. As well as less liquid assets such as savings accounts and money market funds. Since January 2024, the M2 money supply has set a new monthly high. This persistent increase signals that liquidity is flowing into the economy. When M2 increases, money is available for spending and investing in the economy. A rising M2 money supply is a bullish indicator for risk assets like stocks and cryptocurrencies. Historically, this can fuel inflation and impact financial markets. Notably, the Consumer Price Index (CPI), which tracks the rising cost of goods and services, also reflects how inflation trends change. This is because M2’s growth has a direct influence on the CPI. When more money enters the system, it often leads to higher prices of goods and services, making it harder for the Federal Reserve to control inflation. M2 Grows Amidst Federal Reserve Effort to Stabilize the Economy The Federal Reserve has been trying to curb inflation by maintaining high interest rates and reducing its balance sheet through quantitative tightening. The goal is to return CPI inflation to its annual 2% target. However, the continued expansion of M2 suggests that these efforts have not significantly slowed liquidity growth.