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Money Velocity and the Stock Market

March 1, 2021 • Posted in Economic Indicators

Regarding “Money Supply (M2) and the Stock Market”, a subscriber responded: “I’ve always thought…that both M2 and velocity were needed. If there’s more money, but it is not circulating, then it doesn’t have a chance to have much impact. That’s the situation we have right now for the most part.” The Federal Reserve Bank of St. Louis tracks money velocity based either M1 or M2 money supplies at a quarterly frequency, stating that: “Velocity is a ratio of nominal GDP to a measure of the money supply. It can be thought of as the rate of turnover in the money supply–that is, the number of times one dollar is used to purchase final goods and services included in GDP.” Specifically, the bank calculates money velocity as quarterly nominal GDP divided by average money supply during the quarter. Using quarterly values for seasonally adjusted Velocity of M1Velocity of M2 and the S&P 500 Index from the first quarter of 1959 through the fourth quarter of 2020, we find that: (more…)

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