It's been nothing short of a banner year for Wall Street. In October, the ageless Dow Jones Industrial Average (^DJI 0.52%), benchmark S&P 500 (^GSPC 0.11%), and growth-powered Nasdaq Composite (^IXIC -0.23%) celebrated their two-year anniversary of the current bull market. Following the election of Donald Trump for a second (nonconsecutive) term as president, all three stock indexes soared to record-closing highs.

Despite these phenomenal returns, stock market corrections and bear markets are a normal and inevitable part of the investing cycle.

Although there's no predictive tool or forecasting metric that can, with concrete accuracy, forecast short-term directional changes in Wall Street's major stock indexes, there are a small number of events and data points that have strongly correlated with sizable moves higher or lower in the Dow, S&P 500, and Nasdaq throughout history. Investors occasionally lean on these forecasting tools in an attempt to gain an edge.

While a couple of valuation metrics are at or near all-time highs, which has historically not been good news for Wall Street, the bigger concern might just be an economic data point that has a flawless track record of signaling big moves lower in stocks, when back-tested for more than 150 years.

A paper airplane twenty dollar bill that's crashed and crumpled into the financial section of a newspaper.

Image source: Getty Images.

U.S. M2 money supply hadn't done this in nine decades

Though it's typically an off-the-radar economic data point, U.S. money supply has been making waves on Wall Street of late.

The two most-common measures of U.S. money supply are M1 and M2. The former accounts for cash and coins in circulation, along with travelers' checks and demand deposits from a checking account. The best way to think about M1 is cash that can be spent at a moment's notice.

Meanwhile, M2 money supply takes everything from M1 and adds in money market accounts, savings accounts, and certificates of deposit (CDs) below $100,000. This is still money that consumers have access to and can spend, but it requires more effort to get to. It's also the specific money supply measure that's the cause of concern for Wall Street.

The reason M2 is typically an off-the-radar data point is because U.S. money supply had been growing without notable disruption for nine decades. As the U.S. economy expands over time, it's not a surprise that more capital has been needed to facilitate transactions. A steadily rising money supply is indicative of an economy with a solid foundation.

But in those exceptionally rare instances throughout history where M2 money supply has notably declined from its all-time high, it has foreshadowed big-time trouble for the U.S. economy and stocks.

US M2 Money Supply Chart

U.S. M2 money supply data by YCharts.

Based on the latest monthly report from the Board of Governors of the Federal Reserve, M2 money supply totaled $21.311 trillion in October 2024. This is down from a peak of $21.723 trillion in April 2022, which represents a decline of 1.89%.

Even more noteworthy, M2 tumbled by a maximum of 4.74% from April 2022 through October 2023. This marked the first year-over-year decline of at least 2% in M2 money supply since the depths of the Great Depression in 1933.

There are, of course, a couple of asterisks that need to accompany the above statements. For one, M2 money supply has climbed by 3.07% since hitting its nadir in October 2023. As noted earlier, rising money supply is normally indicative of a healthy economy.

And U.S. money supply skyrocketed during the pandemic. Fiscal stimulus led to M2 climbing by more than 26% on a year-over-year basis. This means the 4.74% peak-to-trough decline witnessed from April 2022 through October 2023 might be nothing more than a reversion to the mean after a historic increase.

Then again, history has been quite clear about what happens to the U.S. economy and stocks when M2 money supply meaningfully declines.

Although the data and chart you see above from Reventure Consulting CEO Nick Gerli is dated -- it was posted on social media platform X in March 2023 -- it perfectly illustrates how rare and unnerving year-over-year declines of at least 2% in M2 money supply have been throughout history.

Looking back to the start of 1870, there have been only five instances where M2 fell by 2% or more on a year-over-year basis: 1878, 1893, 1921, 1931-1933, and 2023. The four prior instances all correlate with periods of depression for the U.S. economy and double-digit unemployment. Though Wall Street and the U.S. economy aren't tied at the hip, economic contractions are almost always associated with moves lower in the stock market.

But there are caveats to this data, as well. For instance, the Federal Reserve didn't exist prior to December 1913. What's more, the nation's central bank and federal government are far more knowledgeable and have better tools at their disposal today to combat significant downturns than was the case in 1921 or during the Great Depression. In other words, double-digit unemployment and a depression would be highly unlikely today.

Nevertheless, a meaningful drop-off in M2 money supply does suggest consumers may be forced to pare back their discretionary purchases. This is often a key ingredient to an economic downturn taking shape.

A smiling person reading a financial newspaper while seated at a table in their home.

Image source: Getty Images.

History is a two-sided (nonlinear) coin

Although history is quite clear that stocks don't move up in a straight line, it's important for investors to maintain perspective and recognize that history is a two-sided coin that undeniably favors those who are patient.

As an example, even though the central bank and federal government are considerably more knowledgeable now than they were a century ago about preventing economic downturns, recessions are still a normal and inevitable part of the economic cycle. No amount of well-wishing will stop an eventual contraction from occurring.

However, history has shown that recessions resolve quickly. Since the end of World War II in September 1945, nine out of 12 recessions resolved in under a year, while the remaining three failed to surpass 18 months in length. By comparison, a majority of economic expansions endured for many years, including two periods of growth that topped the 10-year mark.

Even though recessions are a normal part of the economic cycle, history has demonstrated that this cycle isn't linear.

Bull and bear markets on Wall Street's aren't linear, either.

The data set you see above was released in June 2023 by the researchers at Bespoke Investment Group, shortly after the S&P 500 was confirmed to be in a new bull market. Bespoke calculated and compared the calendar-day length of every bear and bull market in the S&P 500 dating back to the start of the Great Depression in September 1929.

Altogether, the 27 bear markets the S&P 500 navigated its way through over 94 years stuck around for an average of 286 calendar days, or roughly 9.5 months. On the flip side, the 27 S&P 500 bull markets endured for 1,011 calendar days, or just a smidge above 3.5 times as long as bear markets.

Something else to note is that, including the current bull market, 14 out of 27 S&P 500 bull markets since the Great Depression have lasted longer than the lengthiest bear market (630 calendar days).

At any given time, there's likely to be a forecasting tool or data point portending trouble for Wall Street. But with proper patience and perspective, even the gloomiest forecasts are no reason to worry.