The following chart tracks RPCM2, the liquidity variable that was introduced in my article, The Money Effect. On balance, stock market investors realize superior returns when the annual change in RPCM2 is above its seven year moving average, and inferior returns when this variable is below this average. Unfortunately, the relationship can break down for a year or two at a time. RPCM2 is most useful for determining the beginning and end of each 7 year (+/- 1 year) boom or bust phase.

With the latest data for M2 money supply furnished by the Federal Reserve Board, October 2008 RPCM2 comes in at a plus $521 while the seven-year moving
average is now at $359. RPCM2 has exploded north as the Fed and the government battle the credit crisis.

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