The Federal Reserves “Dark shadow” Affecting Monetary Policy | News or Noise
Turn the TV on, any given weekend, and you are likely to see one, if not all, of the John Wick trilogy movies. Throughout the series, John Wick is described in ghostly, almost mythical terms. He is a dark figure, dressed only in black, lurking behind shadowy corners. He is the assassin the Russian mob sends to kill assassins. He appears out of nowhere to seek
revenge against others for their wrongdoings. According to his former Russian mob boss, John is a man of focus, commitment,
sheer will…he has been given the nickname, “Baba Yaga”, the Boogeyman.
For those unfamiliar with the John Wick movie character played by Keanu Reeves, there’s a link in the description to the scene when actor Michael Nyqvist’s, playing, Viggo, John Wicks former
boss, introduces John Wick. It’s brilliantly written, eloquently delivered, and perfectly timed, with clips of Wick to set the tone of a ghostly, unstoppable presence nicknamed “Baba Yaga, the Boogeyman.” John Wick.
I’m Chris Perras, Chief Investment Officer with Oak Harvest Financial Group. And This is our investment team’s mid-week release when we examine a news item, headline, or story making the rounds from publicly available sources and ask, “Is it News or Noise?” for your money. This week we take on the story of the Federal Reserve Balance sheet reduction, and if its reduction to come, in September, is “Baba Yaga”, or the Boogeyman” for your money, out to silently hunt and assassinate your investments.
The Fed has used two tools to affect monetary policy since the great financial crisis in 2008 and 2009, interest rates and its balance sheet. More and more bearish slanted stories have hit the news wires lately centered around the reduction in the Feds Balance sheet, also referred to as Quantitative tightening or QT. Recall that the Fed initially announced a combined 47.5
billion per month, $30 billion for Treasuries and $17.5 billion for mortgage-backed securities, in balance sheet runoff for the second quarter. They then said they would double that to $95 billion per month starting in September. While the exact impact on financial market conditions is unknown, many strategists have recently doubled down on bearish second-half market calls, calling for 3000 on the S&P500.
They cite the Fed balance sheet runoff and Quantitative tightening as a big reason, reasoning that QT will remove more liquidity and stability from the markets later in the year. Future QT is the dark shadow lingering over the markets; It’s their unknown. QT, or quantitative tightening is their Boogeyman. Their Baba Yaga. Their shadowy, unseen figure lurking in the dark.
We’ve shared a graph charting the Fed’s balance sheet and the S&P500 a few times over the last three years. Here it is again. It’s available to the public, for free, along with a score of other data on the St. Louis Feds website. One can clearly see from the chart, that yes, historically speaking, the S&P500 has had a harder time moving quickly higher when the Fed’s balance sheet is stable or declining. Check out the time from the second half of 2014 through late 2016. The Fed balance sheet was flat to marginally down, and the S&P500 struggled for 2.5 years. However, in 2017 the Feds balance sheet was flattish, and the S&P500 still broke out and sustained new all-time highs all year. In 2018, post the Trump tax cuts, the Fed reduced its balance sheet, however, the S&P500 still made new, albeit unsustained, all-time highs in the summer, before the almost -20% move lower into Xmas eve in 2018. Historically speaking, is the upcoming round of Quantitative
Tightening later in the year destined to be bad for your portfolio, your Baba Yaga, your Boogeyman, a silent assassin? Not necessarily, but it is news for your portfolio. While It’s likely to be a headwind, there’s no certainty that it will bring about new stock market lows later in the year. At Oak harvest, we think our clients are best served by us helping them plan for their future needs, instead of focusing on the past. The future is always uncertain and that’s why our advisors and retirement planning teams, plan for your retirement needs first, and your greed’s second.
Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at (877) 896-0040, and schedule an advisor consultation.
We are here to help you on your financial journey into and through your retirement years. I’m Chris Perras and from everyone here at Oak Harvest Have a blessed week.
The Fed has used two tools to affect monetary policy since the great financial crisis in 2008 and 2009, interest rates and its balance sheet. More and more bearish slanted stories have hit the news wires lately centered around the reduction in the Feds Balance sheet, also referred to as Quantitative tightening or QT. Recall the Fed initially announced a combined 47.5 billion per month, $30 billion for Treasuries and $17.5 billion for mortgage-backed securities, in balance sheet runoff for the second quarter. They then said they would double that to $95 billion per month starting in September.
