On 11 Jun 2020 The S&P 500 sank more than 5%, the Nasdaq slumped 4.5%, and the Dow Jones Industrial dropped 6.9%, or 1,861 points – the fourth biggest point-drop for the Dow on record. Why? some experts cited bearish comments made by the Fed chairman Jerome Powell the previous day, others believe the market is just take a breath. Although both arguments are partly true, I believe the fundamental reason is the dropping of money supply M1.
Money Supply M1 is the money that are readily accessible for spending / investing. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts.
The correlation between M1 and DJI every investor should know
DJI Dow Jones Index vs M1 money supply chart
From the above chart, everytime the M1 dropped or increased, the DJI moved the same direction 1 to 3 weeks later, for example
- M1 decreased 2.58% from the high of 04/02/2020 to the low of 28/02/2020, and the DJI also crashed 36.76% from the high of 14/02/2020 to the low of 23/03/2020.
- M1 inscread 29.13% from the low of 28/2/2020 to the high of 28/05/2020, and the DJI also popped 48.3% from the low of 23/03/2020 to the high of 08/06/2020.
- Now M1 started to decrease again from the high of 28/05/2020,, is it surprising to see DJI started the crash approx. 2 weeks later?
Is the crash going to continue? Will there be more imminent crashes?
My guess is yes unless the US government keeps giving out free money to affected families. Despite 20m jobs were lost due to the COVID19 pandemic, the US personal disposable income actually increased (see chart below), thanks to the generosity of the US government visit WooCommerce hosting. But how long can they afford to keep this frenzy give away? If this can continue forever, why should anybody bother going back to work?
US disposable income following the COVID-19 pandemic chart
Update 26/06/2020:
The US government and Fed have stepped up their frenzy give away once again, M1 set new record high again in the two week since my original comments dated 14/06/2020, the stock market also recovered some 30% of the lost ground.
Update 16/07/2020:
The Fed data released today saw M1 crashed 1.54% to $5,248.70 billion. The last time this scale of decline was on 10/02/2020 (M1 crashed 1.6%), and and ~1.5 week later the stock market experienced the fastest 35% drop ever seem in history. If the US government hesitates to speed up their frenzy give away to pop up the M1, the crash is certainly imminent. Here is the updated M1 vs major indices chart.
DJI SNP DJI Index vs M1 money supply chart
Update 30/07/2020:
Data today showed the US GDP shrank by 32.9%, in the 2nd quarter of 2020, however personal income actually jumped over 10% in that period, how come? Why should anybody bother to go to work if their income will be higher otherwise? The key is government give away:
“Personal income grew primarily from two big government transfers — one was an economic impact payment ($1.078 trillion), the other was the pandemic unemployment compensation ($639 billion),” said William Spriggs, chief economist at The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO). “Both of those compensated for a $795 billion drop in wages.”
Personal income grew by 7.3% in the second quarter compared with the first one.
But as the extra $600 in weekly unemployment benefits expire this week, unemployed people will get $120 a week instead, personal incomes could plunge and drag down future GDP.
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