U.S. money supply rising may impact stock market recovery

The U.S. stock market has faced challenges since late February. Weak economic data and President Donald Trump's trade war have put pressure on stocks. The S&P 500 briefly fell into correction territory, and many investors are worried about a possible recession or stagflation this year. Despite these concerns, there is some positive news. The U.S. money supply has been rising quickly over the past year. This increase in money supply, known as M2, has historically been linked to better stock market performance. M2 includes cash and certain types of bank deposits but excludes retirement accounts and some large time deposits. The Federal Reserve controls the money supply through tools like interest rate changes and quantitative easing. In recent years, M2 has increased significantly, especially after the COVID-19 pandemic as the Fed injected money into the economy. However, following a period of quantitative tightening, M2 has begun to rise again since early 2024. This may be due to interest rate cuts by the Fed, which lower borrowing costs and potentially lead to more spending in the economy. More money in circulation can inflate asset prices, including stocks. Some investors think that smaller companies may benefit as they have better access to capital for growth. However, there is disagreement about the direct impact of M2 on economic growth. Another concern is inflation, which has caused issues for the U.S. economy since 2022. Although the Fed has made progress in reducing inflation, it's still above its target. High inflation could harm both the economy and the stock market, raising worries about stagflation. Given these mixed signals, it is uncertain whether the growing money supply will lead to a strong stock market recovery. Investors should be cautious, especially with stocks that have very high valuations.