Lessons Not Learned

In the wake of COVID-19, the M2 money supply indicator significantly predicted persistent inflation, contrasting with perspectives minimizing its impact. Currently, the Consumer Price Index shows a year-over-year increase of 3.3%, with core prices up 3.4%, revealing ongoing inflation above pre-COVID levels.

Despite some economists believing the U.S. has avoided recession risks, relying on a trailing S&P 500 price-to-earnings ratio of 24 could lead to surprise when downturns occur, especially as M2 has decreased over the past 18 months. Economic reports, such as a 5.5% drop in housing starts and declines in retail sales and construction permits, suggest weakening activity.

While industrial production increased by 0.9% and GDP growth forecasts remain positive, rising initial unemployment claims and a historically high deficit amidst low unemployment signal potential economic troubles. Investors should remain cautious, as overlooking the implications of M2 could precipitate further unexpected challenges.