Rising U.S. Money Supply Signals Potential Shift in Stock Market Dynamics

Last updated: July 4, 2024
Courtesy of www.fool.com

The S&P 500 is on a roll, hitting new all-time highs in 2024. The benchmark index soared 15% in the first half of the year, up over 50% from the 2022 bear market lows.

Big players are driving this rally, with market concentration reaching levels unseen since the 1970s.

This surge is fueled by robust earnings, especially from companies riding the AI wave. Historically, such concentration doesn’t last, and a key indicator suggests a shift may be near.

U.S. Money Supply on the Rise

Khuram Chaudhry, Head of European Quantitative Strategy at J.P. Morgan, notes that a tight money supply favors larger firms, while abundant money helps smaller ones grow.

Since 2021, the U.S. money supply, particularly M2, has been shrinking. This measure includes cash, deposit accounts, and money market funds – essentially, readily accessible money.

By 2022, M2’s growth was negative, reflecting the Fed’s tightening policies. This trend persisted into early 2024. However, in April and May, M2 grew by about 0.6% year-over-year, marking a return to increased liquidity.

The Fed’s anticipated interest rate cuts could further boost the money supply. Chairman Jerome Powell expects at least one cut this year, but futures markets predict two.

Easier money supply could benefit small business operations, potentially leading the next market rally phase.

Investment Strategies Amid Growing Money Supply

Expecting a shift in market concentration? Here’s how to invest:

Equal-Weight Index Funds: Unlike cap-weighted funds, equal-weight index funds like the Invesco S&P 500 Equal Weight ETF (RSP) spread investments evenly across all S&P 500 companies, reducing reliance on the top firms.

Small and Mid-Cap Stocks: Broaden your portfolio with small-cap stocks through the iShares Russell 2000 ETF (IWM) or the Vanguard Extended Market ETF (VXF), which tracks nearly every stock outside the S&P 500.

Money supply growth isn’t the sole indicator of market shifts, but it’s a strong signal.

Tilting your portfolio towards smaller companies could be a savvy move as signs point to a potential big change in the stock market.

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About The Author

Co-Founder & Chief Editor
Jon Morgan, MBA, LLM, has over ten years of experience growing startups and currently serves as CEO and Editor-in-Chief of Venture Smarter. Educated at UC Davis and Harvard, he offers deeply informed guidance. Beyond work, he enjoys spending time with family, his poodle Sophie, and learning Spanish.
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Growth & Transition Advisor
LJ Viveros has 40 years of experience in founding and scaling businesses, including a significant sale to Logitech. He has led Market Solutions LLC since 1999, focusing on strategic transitions for global brands. A graduate of Saint Mary’s College in Communications, LJ is also a distinguished Matsushita Executive alumnus.
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