S&P500 closely tracking the Fed’s balance sheet

With the S&P500 closely tracking the Fed’s balance sheet in the past three months, which has served as the primary factor behind the rebound in the market, the latest weekly drop coincides with the period of heightened volatility in the past two weeks. The shrinkage comes at a time when the Fed’s monthly liquidity injection has been tapered to approximately $120 billion, which suggests that while the balance sheet is likely to resume growing (through purchases of both ETFs and corporate bonds) in the next week, it will be at a more gradual pace. It also means that for the stock market to surge from this point on, Fed Chairman Powell will need to find another justification to expand the Fed’s QE aggressively.