Stocks have gone up with the Fed’s balance sheet, so what happens when the latter is no longer the case?
There are a lot of things that don’t really matter to the markets much of the time. A short list:
- Geopolitical – the world is always fighting somewhere
- Congress – do they ever get along?
- Data Points – trends > one piece of data
- Analyst Targets – no idea how any of these can be accurate
Not that any of those can’t ultimately change the markets,
but I can’t think of a logical reason to sell because country X on the other
side of the world might invade country Y on the side of the world. How does that matter to the US again?
Anyway, I digress.
One thing I do think matters is the quantitative
easing tapering (QE). QE is when the
Fed buys longer-term Treasuries to force down rates in attempt to increase
lending and subsequently boost the economy.
Its actual impact on the economy can be argued, but from my point of
view it has had a large impact on the stock market:
Shown another way:
So what is obvious from the charts is that the larger the
Fed’s balance sheet, the higher the S&P 500*. Further, when the balance sheet didn’t move
we had almost a 20% move down in the stock market (red circle).
Anyway, the Fed is “tapering” their purchases. What was once $80b a month is now around
$25b. They haven’t stopped buying and
certainly aren’t selling, but they are cutting back. So while day to day noise tend to be the
headlines, the real focus should be on what happens when the Fed’s balance
sheet stops getting bigger?
Please see
the important disclosures that apply to this commentary HERE. See important definition on
the S&P 500 at the same link. The
above charts are for illustrative purposes only and does not attempt to predict
actual results of any particular investment.
In regard to both charts, Source: S&P 500 - FRED and FED Treasury
Holdings - FRED; calculations by CAL and idea via Market Anthropology
