Title: Bank Reserves Expansion Driving Stock Rally, Say Wall Street Strategists
A group of Wall Street strategists believe that the surge in the U.S. stock market this year is not just a result of the economy’s potential soft landing or a Fed interest rate cut. Instead, they argue that the boost is closely linked to the expansion of bank reserves of the world‘s largest central banks, particularly the Federal Reserve.
Former Citigroup strategist Matt King, who now runs his independent research company, Satori Insights, conducted research showing that increases in bank reserves are highly correlated with market performance, emphasizing that the area to pay attention to is the expansion of U.S. banking system reserves.
King pointed out that the sheer reduction of the Fed’s balance sheet, which has dropped its bond holdings to $7.8 trillion from $9 trillion last year, should not be the prime focus of investors. He highlighted that the Fed’s reserves increase by $500 billion since January is what really matters from an investment perspective.
Additionally, King’s research indicates that after the largest central banks declared a war on inflation, they have actually injected roughly $1 trillion in liquidity instead of withdrawing it. This move has been driven by a variety of factors, including outflows from the Federal Reserve’s reverse repurchase facility.
According to King, this wave of liquidity support for the market began late last year and was further bolstered when the Federal Reserve joined the initiative this spring, offering support to the U.S. banking system after the collapse of Silicon Valley Bank.
Noting that people on Wall Street have taken notice, King pointed out that senior strategists at major investment banks discussed the impacts of outflows from the reverse repurchase facility and the Treasury General Account. Goldman Sachs’ cross-asset analyst team has also produced reports highlighting the positive effects of liquidity support on risk assets and funding trends.
Goldman Sachs mentioned that the recent expansion of liquidity, notably driven by outflows from the reverse repo facility and the Treasury General Account, should continue to support stocks through January.
King issued a warning regarding the potential troubles that stocks could face in the absence of the liquidity pulse. Notably, King believes that the market’s rebound in 2023 is on par with the effects of previous post-crisis quantitative easing policies and that the Fed’s subsequent bond purchase plan will likely yield similar results.
Pinning the recent record-breaking numbers in the stock market to the resumption of quantitative easing, King argued that the method of removing bonds and notes from the market has proven powerful in driving prices higher.
As of Wednesday, the S&P 500 index had surged 22.6%, the Dow Jones Industrial Average had closed above 37,000 points, and the Nasdaq Composite Index had gained over 40% since the beginning of the year. King noted that the returns are attributed to changes in reserves, affecting the balance between the money private investors hold and the number of securities available to invest in.
In conclusion, King suggests that the current stock market rally is strongly driven by liquidity support and the alteration in investment prospects brought about by the increased bank reserves.