Market Crashes Often Follow Liquidity Shifts
Every major market correction or crash has a trigger, but more often than not, it boils down to one simple factor: liquidity.
Let’s break that down.
What Drains Liquidity?
Two primary forces control liquidity in the U.S. financial system:
Monetary policy (Federal Reserve): Think interest rate changes, quantitative easing (QE), or tightening (QT).
Fiscal policy (U.S. Treasury/Government): This includes tax changes and government spending.
Individually—or especially together—these can either inject cash into the system or suck it out. And whenever cash gets pulled out, markets tend to feel it fast.
Case in Point: End of 2021
When the Fed ended its money-printing spree in late 2021, it marked the exact top of the S&P 500. What followed?
S&P 500: Dropped 27%
NASDAQ: Dropped 37%
Why? Because the Fed shifted from adding money to the system… to pulling it out. The goal? Fight inflation. The side effect? A broad-based sell-off in equities.
The Easiest Way to Track This: M2 Money Supply
If keeping tabs on tax codes and Fed speeches isn’t your thing, just follow the M2 money supply—a widely accepted measure of cash circulating in the U.S. economy.
Here’s the pattern:
2021: M2 peaks —> market tops.
2022: M2 declines —> markets fall.
2024-2025: M2 begins rising again —> markets recover.
M2 is a lagging indicator, so by the time it clearly shifts, the market often has already moved. But it’s still a powerful signal.
Want to Stay Ahead?
To get early signals, watch:
Fed announcements about future rate hikes or balance sheet moves.
Government policy on taxes and spending.
Liquidity trends across both public and private credit markets.
These clues often foreshadow where money is flowing—or draining—long before price charts catch up.
P.S. If you're trying to time the next market top or bottom, don't just watch the indexes. Follow the money—literally.