Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.
The S&P 500 continues to slide on inflation and interest rate news and is now down 2.7% from all-time highs. The equal-weighted index has faired a bit better indicating that a decent portion of the decline is from the largest holdings in the index rather than the broader stock market.
In the news this week, inflation hits 7% for the month of December which is the highest reading since the 80’s. And top Federal Reserve officials Brainard and Powell state that inflation is their number one priority, further indicating that the central bank will institute money supply controls in the near future.
Last week, we spent a bit of time talking about the Fed Funds rate, the tool the federal reserve can use to limit money supply liquidity in the banking system to combat inflation. This week, I’ll talk about another one of their tools: the balance sheet.
The Federal Reserve has the authority to purchase bonds in the open market including mortgage bonds, corporate bonds, and treasury bonds. When they do so, they add these bonds to their balance sheet. The knock-on effects of this are reduced interest rates and borrowing costs for banks, corporations, and businesses which further stimulate the economy.
Since the Global Financial Crisis, the Federal Reserve balance sheet has grown significantly, shown in red. Actions taken by the Federal Reserve have had several primary and secondary effects on the stock market shown in blue. In order to add liquidity to the bond market following 2008, the Fed began adding to it’s balance sheet. Then in 2013, the Fed began to “taper” those purchases. This caused a very small pullback in the market called the “taper tantrum.” The first rate hike following the financial crisis was in 2015, during a manufacturing recession. In 2017, the federal reserve began reducing the size of it’s balance sheet selling bonds into the open market. This came at a time of increased volatility and a trade war. Ultimately, the volatility ended at the end of 2018 with what has been dubbed the “Santa Drop.” The time period between the financial crisis and 2019 saw the Fed add to its balance sheet, stopped their purchases, and then begin their restrictive monetary policy. This time period had numerous hiccups but ultimately resulted in a 107% return. Currently, the Fed is still adding to its balance sheet but they should begin tapering within the coming months.
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1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved January 14, 2022, from FactSet Database.
2.FactSet Research Systems. (n.d.). S&P 500 Equal Weight (Interactive Charts). Retrieved January 14, 2022, from FactSet Database.
3.FactSet Research Systems. (n.d.). S&P 500, Federal Reserve Balance Sheet (Interactive Charts). Retrieved January 14, 2022, from FactSet Database.
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