Stock market encounters drug shortage.
Swinging the Hammer: Central Banks and the Stock Market
The US Federal Reserve has been taking a drastic step, pulling out a whopping $95 billion in liquidity from the markets each month via bond sales since last September. This move, for the first time post-financial crisis, has resulted in a decrease in the US money supply. The European Central Bank (ECB) is joining the party, planning to remove $15 billion in liquidity monthly starting March, marking the strongest monetary brakes since the war.
So, what's the deal with the stock market? Veteran fund manager Jens Erhardt sees stormy skies ahead: "Historically, stock markets have taken about six months to react to monetary braking measures. Therefore, the stock market and economic outlook for 2023 looks grimmer than ever from a monetary perspective."
Even if the US Fed surprises us all with another interest rate cut by year-end, Erhardt isn't optimistic: "Historically, there's usually a delay between interest rate cuts and a stock market recovery. The bond market first reacts positively to plummeting inflation rates. In the past 50 years, rising bond prices followed with rising stock markets after a 12-month gap." In other words, it's going to be a bumpy ride on the stock exchange this year.
While Erhardt remains tight-lipped about the extent of the impact, let's dive into some insightful principles that can help us understand the situation.
- Central Banks' Movements: The Federal Reserve is shrinking its US Treasury debt holdings as part of its quantitative tightening (QT) program since last June. This reduction can potentially restrict financial conditions, unsettling stock markets by diminishing the availability of loose cash and increasing companies' borrowing costs.
- The ECB has recently lowered its deposit rate, hinting at backing economic growth. This move may help sustain or boost equity market confidence by suggesting support for the economy during sluggish growth.
- Stock Market Impact:
- Liquidity Reduction: Central banks cutting liquidity often lead to increased interest rates and reduced borrowing for businesses and consumers. Such conditions can negatively influence stock prices.
- Rate Cuts: Conversely, rate cuts can stimulate economic activity and boost equity markets by making borrowing cheaper.
As economists and fund managers consider central bank actions while predicting market trends, it's essential to keep these principles in mind. After all, it ain't easy navigating volatile markets, especially when the central banks are shaking things up.
Oh, and Jeff Bezos warns against major purchases and recommends these three assets:[insert enrichment data here]
In the context of central banks implementing monetary brakes and reducing liquidity, veteran fund manager Jens Erhardt predicts a potentially stormy outlook for the stock market, as historically, stock markets have reacted to such measures with a delay of about six months. Meanwhile, Jeff Bezos advises against major purchases and instead suggests investing in certain assets. It's important for investors to consider central banks' actions and their impact on financial conditions, as they can negatively influence stock prices through increased interest rates and reduced borrowing for businesses and consumers, or stimulate economic activity and boost equity markets by making borrowing cheaper.
