Money Supply (M2) and the Stock Market

Some investing experts cite change in money supply as a potentially important driver of future stock market behavior. When money supply grows (shrinks), they theorize, nominal asset prices tend to go up (down). Or conversely, money supply growth drives inflation, thereby elevating discount rates and depressing equity valuations. One measure of money supply is M2 money stock, which consists of currency, checking accounts, saving accounts, small certificates of deposit and retail money market mutual funds. Is there a reliable relationship between historical variations in M2 and future stock market returns? Using monthly seasonally adjusted M2 and S&P 500 Index (SP500) level during January 1959 through April 2024, we find that: (more…)