The M2 money supply in the United States has reached record highs, driven by aggressive monetary easing measures taken by both China and the U.S. Federal Reserve. In August alone, the M2 money supply rose by nearly 1%, prompting the Fed to trim interest rates by 50 basis points. Another 50 basis point rate cut is expected in November, indicating a continued push for liquidity in the financial markets.
The surge in the M2 money supply has had a significant impact on asset prices, with cryptocurrencies leading the charge since the recent Federal Open Market Committee (FOMC) meeting. Financial assets, including the S&P 500 and gold, have soared to record levels, with the S&P 500 reaching a high of 5,735 and gold climbing to $2,670 an ounce. Gold has seen a remarkable increase of 30% year-to-date, making 2024 the best-performing year for the precious metal this century.
Central bank policies have played a crucial role in injecting liquidity into the global economy. The combined balance sheets of the top 15 central banks worldwide have exceeded $31 trillion as of September 25, a level not seen since April 2024. This substantial monetary stimulus has been essential in supporting financial markets amid economic challenges and uncertainties.
China’s commitment to monetary easing, along with the U.S. Federal Reserve’s rate cuts, has further fueled market momentum. Cryptocurrencies have emerged as the best-performing asset class since the FOMC meeting in September. The CME FedWatch Tool predicts a 60% chance of another 50 basis point rate cut at the upcoming November meeting, potentially lowering the fed funds rate range to 4.25-4.50%.
The M2 money supply, which includes physical currency in circulation, savings and time deposits, and money market mutual funds, has consistently shown month-on-month growth since February 2024. In August alone, the M2 money supply increased by nearly 1%, highlighting the ongoing monetary expansion that is driving asset prices higher.
Historically, there has been a strong correlation between the M2 money supply and the performance of the S&P 500. Both have moved in tandem over the past five years, with fluctuations in the money supply often preceding changes in the stock market. The compound annual growth rate (CAGR) of the M2 money supply has been 7% over the past five years, while the S&P 500 has achieved a CAGR of 14%.
Bitcoin, on the other hand, has outperformed both the M2 money supply and the S&P 500 with an impressive CAGR of 50% during the same period. Despite its volatility, bitcoin’s growth rate reflects its increasing prominence as an asset class, benefiting from the same liquidity dynamics that drive traditional markets.
As central banks continue to implement expansionary policies and increase the money supply, asset prices across various classes are expected to appreciate. The correlation between monetary measures like M2 and asset performance underscores the critical role of liquidity in driving financial markets. However, the sustainability of this trend remains uncertain, and the future implications of continued monetary stimulus are yet to be fully realized.
