The Stock Market and The Fed’s Balance Sheet

I don’t think enough people are following the Fed’s balance sheet and its importance to markets.

In the history of the Fed’s existence, its balance sheet has never been bigger. And now, according to their June 14, 2017 announcement, they want to drastically reduce its size. That might mean more than you think. The Fed has been using their balance sheet to buy Treasuries and Mortgage Backed Securities since the Financial Crisis. That process has added massive amounts of liquidity, pushed down interest rates, and shifted investor appetite.

So why am I telling you these things you might already know? Because a quick chart comparing the S&P 500 to the size of the Fed’s balance sheet paints a startling picture. Especially when you consider that the blue line on this chart is going to start turning downward in a big way. The last time the Fed slowed down the growth of their balance sheet, the S&P 500 traded sideways for 2+ years.

I look forward to updating this post in several months: