Caution needed when chasing gains! Unprecedented warning signs in the US economy in nearly a century

Billionaire investor and renowned "Emerging Markets Guru" Mark Mobius has advised investors not to rush to chase recent stock market gains.

In a recent interview with CNBC, the founder of Mobius Capital Partners suggested that investors should keep at least 20% of cash in their investment portfolios while waiting for buying opportunities. He cautioned investors to stay vigilant when unsettling signals appear in the economy.

According to data from the Federal Reserve, the U.S. M2 (broad money supply) surged during the COVID-19 pandemic, but has been contracting for most of the past few years, with the current M2 total 3% lower than its peak several years ago.

M2 has been contracting for most of the past two years

Mobius pointed out that this is the largest decline in the total money supply in nearly a century, adding that bulls should not be too excited about the recent stock market rebound.

"This decline is of great historical significance because M2 has not shrunk so severely in over 90 years," Mobius said.

He explained, "The main concern is that if M2 has been declining since April 2022 and has not kept pace with economic growth, the available funds for discretionary spending will decrease, and discretionary funds are the driving force behind the current economic expansion and the bull market in U.S. stocks."

Other forecasters also see the contraction of the money supply as a potential sign of economic slowdown. Veteran economist Steve Hanke stated that M2 has only contracted four times in the past century, and each contraction has been followed by an economic recession.

This trend aligns with some warnings about the strength of the U.S. economy. Over the past year, the job market has been steadily cooling down, with the unemployment rate recently soaring to its highest level since the pandemic began. Some industries, such as housing and manufacturing, have started to slow down due to the impact of high interest rates.

Meanwhile, Mobius believes that investors should wait for buying opportunities in the market and conduct research on financially strong companies.

Looking ahead, he said, "Look for companies with little or no debt, moderate profit growth, and high return on capital, and be prepared to re-enter the market. Companies with weak balance sheets, low or no profit growth, and high debt will face difficulties."

Currently, investors are entering a more uncertain investment environment, with the market closely watching for recession risks, geopolitical tensions, and the upcoming presidential election.

However, traders are generally more confident in the stock market compared to earlier this month. According to the latest investor sentiment survey by AAII, 43% of investors are optimistic about the stock market in the next six months