Has Slowing Money Supply Growth Led to a Directionless Stock Market?
Money Supply is a very important indicator. It helps show how tight or loose current monetary conditions are regardless of what the Fed is doing with interest rates. Even if the Fed is tight, if Money Supply is increasing, it has an inflationary effect.
One key metric shown below is the “Wenzel” 13-week annualized money supply figure. It was made popular by the late Robert Wenzel who tracked the metric weekly as an indicator for where the economy might be headed. In 2020, the Fed started reporting the data monthly instead of weekly. It should also be noted that Money Supply data can be heavily revised in future months.
Recent Trends
Seasonally Adjusted Money Supply has been growing on a consistent monthly basis for over a year. That said, the latest month saw the smallest monthly growth since January of last year (+$1B). the 13-week money supply growth is also slowing (see below). With less money pumping into the system, the stock market has less fuel to keep advancing. This has potentially led to the choppy, sideways market we have seen over the last 8-12 weeks.
Figure: 1 MoM M2 Change (Seasonally Adjusted)
The increase since December was 0.9% annualized, which is well below trend for the last 6 and 12 months.
Figure: 2 M2 Growth Rates
January average is typically on the smaller side, but still checks in at 4.4% which is well above the current January.
Figure: 3 Average Monthly Growth Rates
Non-seasonally adjusted show a big drop in January (the orange bar), but this is not atypical. Last January saw a drop of $187B.
Figure: 4 MoM M2 Change (Non-Seasonally Adjusted)
The weekly data below shows the spikes and dips. Money supply was growing very steadily until the 2 weeks preceding the latest week.
Figure: 5 WoW M2 Change
The “Wenzel” 13-week Money Supply
The late Robert Wenzel of Economic Policy Journal used a modified calculation to track Money Supply. He used a trailing 13-week average growth rate annualized as defined in his book The Fed Flunks. He specifically used the weekly data that was not seasonally adjusted. His analogy was that in order to know what to wear outside, he wants to know the current weather, not temperatures that have been averaged throughout the year.
The objective of the 13-week average is to smooth some of the choppy data without bringing in too much history that could blind someone from seeing what’s in front of them. The 13-week average growth rate can be seen in the table below.
Growth accelerated for 27 straight weeks but slowed slightly in the latest week. A growth rate of 7.49% is still strong, but it is the first indication of slowing growth in over 6 months.
Figure: 6 WoW Trailing 13-week Average Money Supply Growth
The plot below shows how this year compares with previous years. This year has started at about the average point over the last 10 years. It will be interesting to see if this holds steady or dips some into the spring and summer.
Figure: 7 Yearly 13-week Overlay
Inflation and Money Supply
The chart below shows the history of inflation, Money Supply, and Fed Funds. As shown, in 1970 inflation worked with ~2 year lag compared to Money Supply. Given this, it is possible that another bout of inflation is lurking just under the surface considering the massive spikes in 2020 and 2021. The Fed has already started cutting rates, which will add fuel to the fire. The persistent inflation numbers are a bad sign of things to come.
Figure: 8 YoY M2 Change with CPI and Fed Funds
Historical Perspective
The charts below are designed to put the current trends into historical perspective. The orange bars represent annualized percentage change rather than raw dollar amount.
Figure: 9 M2 with Growth Rate
Below shows the 13-week annualized average over history. This chart overlays the log return of the S&P. Mr. Wenzel proposed that large drops in Money Supply could be a sign of stock market pullbacks. His theory, derived from Murray Rothbard, states that when the market experiences a shrinking growth rate of Money Supply (or even negative) it can create liquidity issues in the stock market, leading to a sell off.
While not a perfect predictive tool, many of the dips in Money Supply precede market dips. Specifically, the major dips in 2002 and 2008 from +10% down to 0%. 2022 was highly correlated with a fall in Money Supply and the rebound has corresponded with the big stock market move we have seen recently.
Please note the chart only shows market data through Feb 3rd to align with available M2 data.
Figure: 10 13-week M2 Annualized and S&P 500
One other consideration is the reverse repo market at the Fed. This is a tool that allows financial institutions to swap cash for instruments on the Fed balance sheet.
Reverse Repos peaked at $2.55T on Dec 30, 2022. Money gushed out from March 2023 to May 2024. The outflows have taken another leg down, starting in October. The level now sits at $96B.
Figure: 11 Fed Reverse Repurchase Agreements
Wrapping Up
Money Supply can be a leading indicator and help explain the action in the stock market. Money Supply fell the entire year of 2022, bottomed in early 2023 has been rising pretty steadily since. This has stopped over the last few months where the market has become choppy and directionless. This might very well be related to the de-acceleration in the money supply we have been seeing lately.
