Markets seem to pause and place themselves in a sideways waiting position in the days immediately preceding important macro data news.
There is one piece of macro data that seems underestimated by many media, probably because it is much more technical and less immediate.
The amount of liquid money in the U.S.: the so-called M2 factor.
Liquidity is a general measure of the amount of money circulating in the economy. And this is important for markets, because the more money circulating in the U.S. economy, the more money investors can allocate to buying equities. Obviously, purchases will tend to drive up the price of stocks, benefiting an upward trend in the market.
Liquidity is a good indicator of overall potential demand for equities.
The best measure of liquidity in the U.S. economy is the Fed’s money supply.
This money supply is represented by a quantity called M2, which is representative of the value of all cash, deposits, and everything convertible to cash. It is a measure of all “short-term” money in the U.S. economy at any given time.
M2 is measured in terms of the year-over-year change noted each month, often related to the rate of inflation.
In December 2022, a phenomenon occurred, to a substantial degree, that had occurred only once since 1943, in January 1959, and much more mildly.
Precisely, the December 2022 year-on-year M2 is negative: by 1.31 percent.
In January 1959, the only time in history in the past 80 years when anything similar had happened, it had turned negative by 0.16%. Every month for the past 80 years the year-on-year figure has never been negative, except on these two occasions. Of course, there have been monthly readings of M2 descent, but not so much as to give a negative value compared with that of 12 months earlier.
On many other occasions in the past, M2 has moved from a down cycle to an upcycle, although it has reached negative levels only twice: to limit the search to the past 60 years, in the years 1966, 1970, 1974, 1995, 2005, 2010, and 2018, the Fed has moved from limiting the economy to supporting it. In all these cases, the stock market went up.
We now know one thing: the excess liquidity that occurred in the past few years, which we did not know how to assess what kind of impact it would create once the cycle of increasing liquidity was over, generated a negative year-on-year M2 figure: that is, the positive excess now creates a negative excess.
This is a very important low, although we do not know how long it will last. We will see if, in the coming weeks, it gives rise to positive market momentum as a backlash to a possible recovery in M2 Macroeconomic data assumes great importance in the evaluation of stock markets.