The Fed’s aggressive rate hikes have already left stocks facing a number of headwinds, but Bank of America said history has taught the Fed’s balance sheet shrinking as a risk to stock prices.
Looking at the historical relationship between Fed bond purchases and S&P 500 returns from 2010 to 2019, quantitative tightening through the end of 2023 will see the S&P 500 fall from current levels , Bank of America concluded in a research note Monday. 7% .
Chris Zaccarelli, chief investment officer at Instant Advisor Alliance, said that quantitative tightening has undoubtedly given way to more pressing issues such as inflation and recession anxiety, but as economic growth continues to slow, the impact of the Fed’s asset reduction may come to the forefront .
Jane Edmondson, founder of EQM Capital, said:
“The market has been celebrating that the next rate hike may be 50 basis points, not 75 basis points, but it doesn’t seem to be focusing on QT. I think the market’s mentality is: given that the Fed has communicated the QT plan very well, so The news has been priced in by the market.”
The Fed began shrinking its balance sheet by $8.9 trillion in June and is gradually increasing the pace of the reduction, which will eventually reach $1.1 trillion a year. In the two months after the Fed began shrinking its balance sheet, the S&P 500 rose 4.8%. Zaccarelli said:
“If financial conditions tighten significantly, then QT could become a more important topic. I think it’s difficult to have a high degree of certainty about the impact of QT on the stock market, so I’ll focus more on S&P earnings, rather than a price-to-earnings ratio.
A recent study by the Atlanta Fed found that the impact of shrinking the balance sheet on the economy was relatively small compared to the Fed raising interest rates to fight inflation, with no more than three 25-basis-point rate hikes over time.