U.S. Money Supply Is Making History on Both Ends -- Including a First Since the Great Depression -- and It Portends a Wild Ride for Stocks

Recent volatility in the Dow, S&P 500, and Nasdaq coincides with historic fluctuations in the U.S. M2 money supply, which saw its first significant decline since the Great Depression followed by a record high, potentially signaling continued market turbulence. Historically, M2 declines have correlated with economic downturns, but modern monetary policy changes complicate direct comparisons; however, the whipsaw effect in M2 suggests investors should prepare for increased volatility, though long-term data indicates that patience in the market has consistently yielded positive returns.

Analysis

Recent market activity, particularly in April, highlighted significant volatility across major U.S. stock indexes, with the S&P 500 experiencing both its fifth-largest two-day percentage decline since 1950 and its largest single-day nominal point gain within a single week. This turbulence coincides with unprecedented fluctuations in the U.S. M2 money supply, a metric historically correlated with economic and market shifts. Between April 2022 and October 2023, M2 saw a peak-to-trough decline of 4.76%, or over $1 trillion, marking the first year-over-year drop of at least 2% since the Great Depression. Historically, such declines (occurring only four previous times in 155 years: 1878, 1893, 1921, 1931-1933) have correlated with economic depressions and high unemployment, although the absence of the Federal Reserve in the earlier instances and evolved monetary/fiscal policy significantly reduce the likelihood of similar severe outcomes today. Subsequently, by April 2025, the U.S. M2 money supply reportedly reached an all-time high of $21.863 trillion, completely erasing the prior contraction. This 'whipsaw' effect, potentially a reversion to the mean after M2's over 26% YoY surge during the COVID-19 pandemic, is a phenomenon not witnessed since the mid-1930s and portends continued heightened market volatility in the forthcoming quarters and years. Despite these destabilizing signals, long-term market data remains encouraging: U.S. recessions post-WWII have averaged only 10 months, compared to average growth periods of five years, and S&P 500 bear markets (average 286 days) have been substantially shorter than bull markets (average 1,011 days). Furthermore, Crestmont Research data indicates that all 106 rolling 20-year total return periods for the S&P 500 since 1900 have yielded positive returns.

Key Decisions for Investors

• Investors should anticipate and prepare for increased market volatility in the near to medium term, directly influenced by the historic and rapid 'whipsaw' movements observed in the U.S. M2 money supply.
• Maintaining a long-term investment horizon is paramount; historical analysis, such as the positive outcomes of all 106 rolling 20-year periods for the S&P 500, underscores the benefits of patience through market cycles.
• Recognize that while M2 contraction has historically signaled economic weakness, modern policy tools mitigate extreme outcomes, and economic downturns have consistently been shorter than periods of expansion, suggesting that enduring volatility can be conducive to long-term growth.