M2 Money Supply is precarious; wither the stock market?

M2 Money Supply has started to roll over from an extreme high

I don’t pay a lot of attention to M2 Money Supply (nor another Fed data set called Velocity of Money) because I think it is a big, dumb, dull instrument compared to many more sensitive indicators. But when I look at the M2 Money Supply graph I am struck by a few things.

First, the graph (last updated 11.22.22)…

m2 money supply
M2 Money Supply – St. Louis Fed
  1. The little blips that accompanied the 2008 and 2020 recessions were nothing compared to the monstrous rise in M2 Money Supply courtesy of the panicking Fed in 2020, and the potential for precipitous downside as it just starts to roll over from this abominable result of the Fed’s most recent inflationary operations.
  2. Beyond the scope of this post I have been thinking about (and discussing in NFTRH) inverted yield curves and other measures of oncoming danger and having an open mind with respect to whether or not the stock market has already done most of the work in its 2022 bear market, getting a head start on the tightening cycle; whereas historically the market did not go bearish until the Fed had already tightened to the max for a given cycle.
  3. The other option we’ve been discussing in NFTRH is that maybe stock markets ‘ain’t seen nuthin’ yet where bear market damage is concerned.

So, has the stock market already discounted the coming disinflationary period and/or deflation scare or is there another major shoe to drop, price wise? The M2 Money Supply graph above appears to argue for a lot of downside from its historical distortion to the upside. Wither the stock market in 2023? Looking at gross distortions like the above, I would not be surprised. H1 could be a rough one when the Q4-Q1 relief party peters out.

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