The SP500 was pushed above 4,400 points. The first time we saw such values for the index was in the summer of 2021, when the Fed was literally helicoptering $120bn a month into the markets and keeping the rate at zero as part of its support for the economy during the coronavirus pandemic. Such actions by the regulator eventually lifted the U.S. market to 4,818 points in early 2022.
Then, when it became clear that the Fed was starting to raise rates and end QE, the market went into a correction, dropping to 3,500 points in the fall of 2022. Eight months have passed since then, the Sp500 is already up 27%. Pretty good. Except the Fed has been tightening monetary policy and continues to do so. The rate is already above 5% and the Fed’s balance sheet is shrinking, for better or worse. That is, it is very different from the conditions we saw in July 2021 and April 2022, when the SP500 was at current levels.
It is clear that BigTechs are the main contributor to the current growth, but it doesn’t change the point, the market is very high again. Corporate buybacks and excessive shorts from hedge funds have pushed the market up. But without new injections from the Fed and strong economic growth, it won’t grow for long.
The Fed continues to actively fight inflation, so far with mixed success, so no new stimulus to expect. Unless something serious breaks down in the economy and the labor market weakens, core inflation is unlikely to return to the 2% level, which is the Fed’s target. That is, the regulator will not move to loosen monetary policy without some serious problems arising in the economy. And if they arise and will be serious, it will lead to a decline in the market.
There is a good saying in the market – “Don’t fight the FED”. Yes, the market is growing now, but we should not forget about the actions of the Fed, which are just contrary to the growth of the market.
