Fed Balance Sheet Still a Support
Though the Fed has committed to extremely low interest rates for an extended period, the stock market, and especially value-oriented shares, are extremely sensitive to the central-bank balance sheet, and should remain supported by its cue. Periods of balance-sheet expansion this cycle offered stocks very strong 13% annualized returns, while episodes of no growth flattened those to just 7.6%. Notably, each attempted shift to a more hawkish balance-sheet policy led major corrections in stocks, including the 2011, 2015 and 2018 meltdowns, while each expansion accompanied significant gains.
The Fed's balance sheet started rising again on July 8 and remains supportive of a rotation into value-oriented shares, which have outperformed by 70 bps since.
Though the Fed has committed to extremely low interest rates for an extended period, the stock market, and especially value-oriented shares, are extremely sensitive to the central-bank balance sheet, and should remain supported by its cue. Periods of balance-sheet expansion this cycle offered stocks very strong 13% annualized returns, while episodes of no growth flattened those to just 7.6%. Notably, each attempted shift to a more hawkish balance-sheet policy led major corrections in stocks, including the 2011, 2015 and 2018 meltdowns, while each expansion accompanied significant gains.
The Fed's balance sheet started rising again on July 8 and remains supportive of a rotation into value-oriented shares, which have outperformed by 70 bps since.