The stock market has been the go-to asset class for investors looking to grow their wealth over the last century. While other investment options like Treasury bonds, housing, or commodities have had their moments, none can compare to the consistent returns provided by stocks over the long term. However, the stock market is not without its ups and downs.

Despite the current bull market trend in major indexes like the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite, a recent dramatic sell-off in August served as a stark reminder that sentiment can change quickly on Wall Street. While it’s challenging to predict short-term market movements, there are certain indicators and metrics that have historically correlated with significant shifts in stock prices.

One such indicator with a perfect track record of foreshadowing major stock market moves is the U.S. money supply, specifically the M2 money supply. M2 includes cash, demand deposits, money market accounts, savings accounts, and CDs under $100,000. In rare instances where M2 has declined, it has signaled trouble for the economy and stock market.

Recent data shows a decline in the U.S. M2 money supply, marking the first significant drop since the Great Depression. While there are some caveats to consider, such as the year-over-year growth in M2 and the impact of fiscal stimulus measures during the pandemic, historical data suggests that sharp declines in M2 are associated with economic turbulence.

Only five instances since 1870 have seen a 2% or greater drop in M2, all of which correlated with economic depressions and high unemployment rates. While the likelihood of a depression today is low due to modern monetary and fiscal policy tools, a decline in M2 could still signal a recession and impact stock market performance.

Investors are encouraged to remain patient and optimistic during market downturns, as history has shown that economic expansions tend to outweigh recessions in the long run. Despite the potential for stock market corrections and bear markets, staying focused on the bigger picture and maintaining a long-term perspective can help navigate uncertain times.

Ultimately, the stock market has a history of rebounding from downturns, and investors who remain patient and optimistic are often rewarded in the end. By understanding historical trends and staying informed about market indicators like the U.S. money supply, investors can make informed decisions and weather market fluctuations with confidence.