Is the Fed’s Balance Sheet Driving the Stock Market?

The Federal Reserve (Fed)’s balance sheet totaled $4.17 trillion as the stock market was declining on February 17. From the lows of March 23, the Fed’s balance sheet rose to $5.25 trillion. On June 8, the balance sheet peaked at $7.17 trillion as the major averages set cycle highs. On June 29, the balance sheet slipped to $7.01 trillion.

The increasing balance sheet clearly was a factor that drove the stock market higher.

The stock market upsurge has been led by the Nasdaq Composite. Veteran strategist Ed Yardeni, president of Yardeni research, said stocks are starting to "look like 1999 all over again," during a CNBC interview in July 2020. He said actions by the Fed, including purchasing corporate bonds, have prompted a move out of bonds into equities, causing the latter to be in "the mother of all melt-ups." The Fed announced in early July it spent $428 million in its first round of corporate buying, as part of its $250 billion programme. Yardeni said the Fed's decision to keep interest rates at zero will also force price-to-earnings ratios on stocks to turn higher. Normal fair value PE (before Covid-19) was 15, now it is 22.

Yardeni believes the Fed has poured in so much liquidity that there is a potential for something like 1999 all over again. That was the 2000 dot-com bubble. According to him, we could be looking at the “mother of all melt-ups” soon. His final advice is “if you are in the equity market, stay with it, otherwise wait for the market to consolidate”.

References:

1. The Fed’s Balance Sheet Is Driving The Stock Market, Richard Henry Suttmeier, 0 July 2020 (https://www.forbes.com)

2. A veteran strategist warned that the Fed is driving stocks into 'the mother of all melt ups,' and says the market is starting to 'look like 1999 all over again', Saloni Sardana, 7 July 2020 (https://markets.businessinsider.com)