After being nurtured by the Fed since 2008, stocks have taken on a life of their own since QT began. And it’s not working.
Written by Wolf Richter of Wolf Street.
In this inflationary world, there are some things going on that go against conventional wisdom, such as that stocks are a hedge against inflation. After all, since his QE started in 2008, all previous wisdom has been thrown out and all new wisdom is about QE and now his QT. In other words, QE raises stock prices and QT lowers stock prices, regardless of inflation or inflation. The real economy does that.
Nasdaq Composite Friday’s closing price was 12,643, a decline of 22% from the November 2021 peak, which returned to its initial level on December 16, 2020. Despite big fluctuations, it didn’t go anywhere for almost three years.
And the massive rally by July 2023, triggered by the Fed’s lightning-fast $400 billion liquidity injection in response to the banking panic, threatens to be the biggest and worst rally in history. The problem is that the Fed raised liquidity soon after and now has a record QT of over $1 trillion.
S&P 500 index Friday’s close was 4,117, down 14.6% from the peak on January 3, 2022, and back to the initial level on April 9, 2021.
In other words, despite all the twists and turns, nothing has progressed for about two and a half years. And the huge stock rally caused by the Fed’s $400 billion bank panic drug disappeared in early August, and the QT Way continued downhill.
Russell 2000 index, The small-cap stock tracker closed at a three-year low of 1,637 on Friday, down 33.4% from its Nov. 8, 2021 high, and back to Oct. 9, 2020 levels.
As a result, small-cap stocks, which often lead large-cap stocks, hit a three-year low. I’m getting more and more interested.
The small-cap stocks in the index were largely forgotten in the wake of the Fed’s $400 billion liquidity injection, which caused large-cap stocks to soar. These stocks, along with a handful of other giant stocks, became known as the Magnificent 7. It supported the entire market and eventually fell.
But this is a small fry that hit a three-year low.
For roughly the same period, the Fed fueled stock price gains with massive quantitative easing, before starting to taper it until the end of 2021. Quantitative easing ended in early 2022. Since then, the company’s balance sheet has declined by $1.06 trillion to $7.91 trillion, its lowest level since May 2021.
Stock prices and the Fed’s balance sheet clearly do not move in lockstep. But the liquidity the Fed pumps into the market pushes up asset prices, which is what causes stock prices to rise the fastest, and the liquidity lift pulls the rug out from under stocks.
Back when QE was pushing up stock prices, everyone who invested in stocks was a genius and people were coming up with all kinds of theories as to why stocks were going up and up, but in reality the only reason why stocks were going up and up was QE was the Fed’s fault.
Then something big broke.the Fed’s biggest responsibility is price stability.
Consumer price inflation is at its worst in 40 years, and even the Fed, after being in denial for so long, admits it’s a problem and cracks down on it with big rate hikes, bringing the policy rate from 0.25%. The rate was raised to 5.5%. %, QT so far he is $ 1.6 trillion.
And the road to QT is still long. Inflation appears to be well-entrenched, with the worst-of-goods and services inflation statistics suddenly worsening on Friday. Therefore, I tweeted this. Take a look at PCE inflation in “core services,” housing, and non-residential core services to feed the cow.
As a result, hopes for an immediate change in Fed policy, which have been talked about since June 2022, are now all but extinct. QT is on autopilot in the background, interest rates and inflation have been trending upward for a long time, stocks are coming into their own for the first time in many years after being nurtured by the Fed since 2008, but it’s not because of them. I am working out.
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