This marked the first drop-off of at least 2% in M2 money supply from an all-time high, as well as the first year-over-year decline of at least 2%, since the Great Depression.

Before digging any deeper, be aware that there are two caveats to this meaningful decline in M2 money supply.

First, M2 is once again climbing. Based on the September 2024 reading of $21.221 trillion, M2 has risen by 2.7% on a year-over-year basis, which would generally be good news for the U.S. economy. In aggregate, M2 is still 2.31% below its all-time high.

Second, this peak-to-trough drop in U.S. M2 money supply followed a historic year-over-year expansion of more than 26% during the height of the pandemic. Fiscal stimulus and historically low interest rates flooded the U.S. economy with capital. In other words, it’s possible this first-in-90-years decline in M2 is a benign reversion to the mean following a never-before-seen expansion of the money supply.

However, more than a century of history suggests this decline may have more ominous implications.

In March 2023, Nick Gerli, the CEO of Reventure Consulting, released the post you see above on the social media platform X (formerly known as Twitter). Using data from the Federal Reserve and U.S. Census Bureau, Gerli was able to back-test M2 growth and contraction over more than 150 years.

Although this post is more than a year old, it highlights key correlations between rare year-over-year declines in U.S. M2 money supply and big-time weakness in the U.S. economy.

Since 1870, there have been only five instances where M2 fell by at least 2% on a year-over-year basis: 1878, 1893, 1921, 1931-1933, and 2023. All four prior occurrences correlate with a U.S. depression and double-digit unemployment rate.

Once again, there is a caveat to this data. Specifically, the Federal Reserve didn’t exist in 1878 or 1893, and the fiscal and monetary-policy tools and knowledge available today far exceeds what was known and understood in 1921 and during the Great Depression. In short, a U.S. depression would be incredibly unlikely to occur in modern times.

Nevertheless, the biggest peak-to-trough decline in M2 since the Great Depression signals the possibility of consumers having to reduce their discretionary spending. Traditionally, this is a key ingredient for an economic downturn.

Based on research from Bank of America, roughly two-thirds of the S&P 500’s peak-to-trough downturns occur after, not prior to, a recession being declared.

But while history foreshadows trouble for Wall Street in the quarters to come, time continues to be an undeniable ally of investors willing to take a step back and look to the horizon.

As much as workers and investors might dislike economic downturns, they are — just like stock market corrections and bear markets — an inevitable part of the economic cycle. Yet what’s important to recognize is that upswings and downturns within the economic cycle aren’t mirror images of each other.

Since the end of World War II in September 1945, the U.S. economy has navigated its way through a dozen recessions. Out of these 12 recessions, nine resolved in less than a year, and the remaining three wrapped up in 18 months or less.

On the other end of the spectrum, the overwhelming majority of economic expansions stuck around for multiple years, including two periods of growth that surpassed the 10-year mark. Investors counting on the U.S. economy to expand over the long run have been handsomely rewarded — and the same can be said for those who are wagering on the stock market to head higher over time.

In June 2023, shortly after the S&P 500 was confirmed to be in a bull market following its 2022 bear market low, the researchers at Bespoke Investment Group released the post you see above on X. Bespoke calculated 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.

Bespoke’s data set found the average S&P 500 bear market lasts just 286 calendar days, or roughly 9.5 months. Comparatively, the typical S&P 500 bull market over 94 years endured for 1,011 calendar days, or approximately 3.5 times longer than the average bear market.

To boot, 14 of the 27 bull markets — including the current one — have lasted longer than the lengthiest S&P 500 bear market on record.

Regardless of the sophisticated software you use or the historic data points you rely on, you’ll never be able to concretely determine which direction the Dow, S&P 500, and Nasdaq Composite will head over the short term.

But history is quite clear that Wall Street’s major indexes, and the stock market’s most-influential businesses, will increase in value over time. Allowing time to work its magic makes even the most frightening of historic data points appear benign.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy.

U.S. Money Supply Recently Did Something That Hasn’t Occurred Since the Great Depression — and It May Foreshadow Trouble for Wall Street was originally published by The Motley Fool