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
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. 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?
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.