The dreaded “death cross” has come to Wall Street. The media has mentioned the infamous harbinger of the Dow Transportation Index a lot lately—and why not? In journalism, they say, “If it bleeds, it leads.” And what could sound bloodier for the stock market than the “death cross”?
The term “death cross” refers to a scenario where a falling 50-day moving average crosses below a falling 200-day moving average, touted as a bad omen for the economy. The Dow Transportation Index comprises companies such as Uber, Union Pacific, UPS, Delta, and others that transport goods and people across the nation and the globe. When those stocks are performing poorly, intuitively, it feels like a sign that the economy is slowing. I cannot argue with that logic.
According to Bespoke, the average and median returns one, three, six, and 12 months later are not only positive for the Transports but also better than in all other periods.
This is an example of something that sounds scary but is not. Know what else is scary? Inflation. What can cause inflation? More money in the system. But an ample money supply does not have to be frightening.
There is plenty of money to supply to stocks
The following chart depicting the increasing amount of money in the economy since 1960 is astounding.
Far from frightening, investors in assets want a higher level of money supply because it drives up the prices of assets such as stocks, houses, and other investments.
The money supply experienced a significant decline from April 2022 to October 2023. Since then, however, it has bounced back by 4.3 percent, approaching an all-time high. Stock market levels remain correlated throughout those periods of declining and rising levels of money supply, as measured by M2 in the above chart.
(Nerd alert: Feel free to skip this paragraph.) The Federal Reserve lists the “money supply” into two categories: M1 and M2. M2 is the broader measure, encompassing M1 components (cash and checking accounts) as well as other liquid holdings, such as savings and money market accounts.
In other words, the money supply refers to the cash that can be spent. The Federal Reserve can control the money supply through quantitative tightening or easing, as well as by adjusting interest rates.
When the money supply is high, it does not just boost investments. Unfortunately, the negative effect of asset appreciation is increased costs, also known as inflation, for others. The money supply increased dramatically in 2020 and 2021, during the early months and years of the COVID-19 pandemic.
In a 2020 article, I noted that M2 advanced by a record 24.4 percent year-over-year in the fourth quarter of 2020, reaching a record high of $19.1 trillion. The article highlighted that such unprecedented growth in household liquidity could lead to increased nominal spending, potentially impacting various asset classes. And, indeed, the result was a massive rise in prices. That is why the Federal Reserve aggressively raised interest rates in 2022 and 2023—to drain the money supply from the system and quell inflation.
The Federal Reserve is continuing its quantitative tightening; however, it has dramatically cut interest rates, starting in September 2023, which has led to a recent increase in the money supply.
Historically, there has been a positive correlation between money supply growth and economic activity. For instance, in the early 1980s, a significant increase in M2 was followed by robust economic growth. Specifically, before 2020, the largest yearly increase in M2 was 12.6 percent in the second quarter of 1983. Over the following 18 months, the average year-over-year growth in real gross domestic product (GDP) was 7.1 percent, and inflation, as measured by the Personal Consumption Expenditure Index (PCE), grew by 3.9 percent
The recent jump is not as significant, but it is in the right direction if you are hoping to escape a recession and preserve the value of your investment portfolio. M2’s year-over-year gain has been the largest since July 2022.
An increase in the money supply can lead to more liquidity in the financial system, potentially boosting stock prices as investors have more capital to allocate to equities. Other variables are always in play; however, the increase in M2 could have the following effect on the stock market:
Liquidity and Asset Prices: An increase in the money supply can lead to higher liquidity, potentially boosting asset prices, including stocks.
Inflation Considerations: Rapid M2 growth may trigger inflationary pressures. In the early phases of higher inflation, companies are typically adept at passing on costs to consumers and increasing their profit margins, which can benefit companies in the short term.
Size Counts: Smaller companies may find it easier to access capital, resulting in more substantial returns. This may not necessarily mean companies comprising the Russell 2000 small-cap index, but it could impact companies outside of the so-called Magnificent Seven—the largest U.S. companies.
Although higher levels of the money supply are positive for stock prices, the future remains uncertain. While there is a historical correlation between M2 growth and economic performance, the relationship with stock market trends is influenced by various factors. These factors include hard-to-predict fiscal policy. However, one thing is certain: Scott Bessent is one of the greatest market minds to have ever held the position of United States secretary of the Treasury. I believe he is significantly more informed than Steven Mnuchin, the previous secretary under President Trump, or Timothy Geithner, the secretary under President Obama.
In the 1970s and 1980s, there was this iconic television commercial that fellow old-timers might remember. The commercial was for a prominent American stock brokerage firm founded in 1904, later acquired and rebranded. The famous slogan was, “When E.F. Hutton talks, people listen.”
When Scott Bessent talks, people should listen if they want to know what fiscal advice the White House is receiving. Bessent has recently given two hour-long interviews and many shorter ones. The following are some bullet points of his recent talks. (I will italicize highlights within the bullet points so you can skim even faster.)
- The connection between spending and debt: Scott Bessent emphasizes that the issue is not a revenue problem but a spending problem. With the current government spending at 25 percent of GDP, reversing it to a historical average of about 21 percent is critical, in his view.
- Deficit reduction strategy: Bessent outlines that cutting government expenditure does not mean eliminating services; rather, it could mean enforcing stricter efficiencies within agencies. This point emphasizes a business-like approach to government operations, suggesting that better management and efficiency could reduce costs without sacrificing service quality. Bessent discusses his ambition to decrease the deficit to 3.0 to 3.5 percent of GDP by 2028.
- International trade and tariffs: Bessent posits that the U.S. needs to redefine what it means by “free trade.” Historically, free trade has favored countries with imbalanced trade practices. He argues that the transition to a fairer trade system is crucial for ensuring equitable opportunities for American workers and for restructuring the economy toward sustainable growth. This suggests a recalibration of international trade norms might be necessary to avoid decades-long disparities. The administration believes tactically applied tariffs can help rejuvenate the American manufacturing sector. By imposing tariffs, the U.S. aims to counter the advantages foreign nations have gained through unfair competition practices, including currency manipulation and government subsidies. The positive short-term impact of these tariffs could lead to increased domestic job opportunities, which have historically been hollowed out by trade policies that favor lower costs over fair employment practices.
- Job creation strategy: The secretary notes that real economic recovery hinges on allowing the private sector to create jobs. This perspective highlights a shift in focus from direct employment opportunities (public sector jobs) to creating an environment that encourages companies to generate new jobs through investment in the United States. The long-term vision is a stronger U.S. workforce that can compete globally.
- Real estate and the American Dream: Bessent discusses the importance of stabilizing interest rates and facilitating lower mortgage costs as part of the administration’s strategy to restore the American Dream. By focusing on housing expectations, he highlights the administration’s intent to provide financial opportunities for families to own homes, which is a core aspect of the middle-class American aspiration.
Two notable points emerge from Bessent’s recent interviews. First, Bessent’s explanation of fiscal policy offers little deviation from one conversation to another. Why is that important? Even some of President Trump’s most staunch supporters criticize his whipsawed approach to assigning fiscal policy, especially tariffs. This suggests that Trump’s April 2, 2025, deadline for tariff reciprocity (i.e., the U.S. will impose tariffs that match those of that foreign nations apply to the U.S.) is likely to play out as proposed (as opposed to any wild version of the proposal).
Second, we have some clues about the economy and the sectors that would benefit from the administration’s policies, namely domestic manufacturing, logistics, and distribution. Manufacturing is likely to reap the most significant benefits from tariff implementations aimed at promoting domestic supply chains. Industries oriented towards heavy machinery, consumer goods, and automotive parts will likely benefit from reduced foreign competition. A shift in manufacturing back to the U.S. will demand a robust logistics network to facilitate the movement of goods. Consequently, the logistics sector may benefit as companies establish more domestic distribution centers.
Unfortunately, reducing government spending, also known as austerity, is problematic for the U.S. economy. To achieve the White House’s desired outcome, they are using tactics that increase the chances of a recession. However, my baseline prediction remains that there will be no recession in 2025. Bank of America CEO Brian Moynihan has some insight that, so far, supports that baseline. Moynihan acknowledged a cautious consumer sentiment stemming from changes in federal policies and restrictive monetary policy affecting borrowing costs. However, he noted that while consumer confidence fluctuates, actual spending behavior suggests a certain resilience.
Bank of America has approximately $4.5 trillion of client cash in its accounts, so the data collected from the bank is not a small sample set. The bank has found that consumer spending by its customers has increased by six percent year-to-date through mid-March 2025, compared to the same period last year. Despite some companies in the retail and airline sectors reporting weakness, Moynihan asserts that overall consumer activity remains robust, with consumer preferences shifting toward near-home entertainment and dining, as well as a shift from goods to services.
My level of concern regarding the economy and the stock market remains elevated. Still, I do not yet consider it a reason to take more than a small measure of defensive action for my investment portfolios.
