M2 Grows for a 16th Straight Month

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. The chart below shows the consistency of that growth with the recent month clocking in at $94B. This is the second strongest month since 2021.

Figure: 1 MoM M2 Change (Seasonally Adjusted)

The increase since January was 5.3% annualized, which is above the 3.9% over the past year.

Figure: 2 M2 Growth Rates

February average is typically around 5.6%, which puts the latest month in the average range.

Figure: 3 Average Monthly Growth Rates

Non-seasonally adjusted shows solid gains for two months in a row.

Figure: 4 MoM M2 Change (Non-Seasonally Adjusted)

The weekly data below shows the spikes and dips. The most recent week shows the large spike that has made up for sluggish growth over the last several weeks.

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 has slowed slightly over the last 5 weeks. The growth rate is now 6.21% which is down from the near-term peak of 7.65% but still relatively high.

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. Growth typically slows from this point into August so it will be interesting to see what happens with all the political and market turmoil from the last few weeks.

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. Money Supply slowed dramatically in 2023 and 2024 but has been moving back up. Inflation has also been stickier than the Fed would like, but unfortunately, they cannot do much given the large debt load of the US Government and Corporations.

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. The money supply has been slower over the most recent 5 weeks starting with the Feb 3rd data point. The market has followed in lock step with the slowing growth.

Please note the chart only shows market data through March 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 been muted since with the current balance around $200B.

Figure: 11 Fed Reverse Repurchase Agreements

Wrapping Up

While M2 is growing, 13-Week trailing is slowing. The 13-week trailing tends to be a better indicator and help explain the action in the stock market. In the analysis last month, the 13 week data started to show the first inkling of deceleration (on a lag basis – the report was published Feb 23rd for data available ending Feb 3rd). This was another event where slowing money supply was immediately followed by stock market weakness.

While there are certainly many factors to consider, it’s hard to ignore the strong correlation 13 week money supply growth has to the stock market.