Key take-aways:
- Pare back discretionary spending in 2025
- AI may be here to stay
- It’s too early to narrate 2025 market outcomes
It’s been nothing short of a banner year for Wall Street. In October, the ageless Dow Jones Industrial Average (DJI), benchmark S&P 500 (GSPC), and growth-powered Nasdaq Composite (IXIC) 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 indexes soared to record-closing highs. Despite these phenomenal returns, we don’t want to assume everything will continue going up… (even though we hope it will).
Which brings us to an off-the-radar economic data point, the U.S. money supply – M1 and M2. M2 money supply takes everything from M1 (cash in circulation, along with travelers’ checks and deposits from checking accounts) and adds it to savings, money markets, and CDs below $100,000. In short, M2 is money that consumers have access to and can spend, but it requires more effort to get to. The concern Wall Street has is that M2 money supply has notably declined from its all-time high. This in of itself is not necessarily a concern, however history has taught us that this could lead to trouble for the U.S. economy and stocks.
There are, of course, a couple of asterisks that need to accompany the above statements. For example, the nation’s central bank and federal government are far more knowledgeable and have better tools at their disposal today to combat significant downturns. Nevertheless, a meaningful drop-off in M2 money supply does suggest consumers should pare back their discretionary purchases. This is often a key ingredient to an economic downturn taking shape.
Aside from that, we still feel optimistic about AI driving the economy. Though investors are seeing higher highs, we don’t see AI pairing back anytime soon. As a matter of fact, we feel it will create more economic growth. Take our firm for example, we are looking to integrate AI into our website to provide self-help for those wanting additional guidance. We are also looking into bringing AI into our telephone systems to help assist with your questions prior to speaking to your Advisor. We are entering a new normal where technology can assist in ways we never thought imagined. However, AI should only be used for surface or non-personal work. Sharing personal data to me opens pandora’s box and once that is open… it can’t be shut. But for the time being, we will continue looking at opportunities in this sector.
On Friday, investors will receive crucial labor market data, which could give the Federal Reserve more clues on whether it should hold rates steady or continue its cutting cycle. Fed governor Christopher Waller said on Monday he’s leaning toward supporting another rate cut, but he may change his mind if inflation data surprises to the upside.
Regarding the impact of the election, President-elect Trump favors a more protectionist trade environment by imposing tariffs on imported goods. There is real debate as to the effectiveness of tariffs which can raise prices, limit the flow of goods causing inflation or causing countries to retaliate with their own tariffs. The recent pre- and post-election market moves highlight the ever-present uncertainty of the investment environment. Adding Trump’s dramatic announcements, often delivered through social media posts, can also amplify short term market moves. So, it is too early to tell what will solidify into policy. Clients are best served with investment solutions focused on appropriate asset allocation, diversification, and sound financial planning to help achieve the desired return objectives based. This, in turn, reduces the risk of making unnecessary changes at inopportune moments.
In summary, until a forward path for longer-term rates becomes clearer, we continue to focus on moving new cash into a mix of equities and short to intermediate maturities in managed portfolios into the where appropriate. The goal, moderate risk while exploiting opportunities for calculated returns. See you in 2025!!!
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From <https://finance.yahoo.com/news/u-money-supply-recently-did-100600639.html>
