We've seen many comments that the market moves could be coming from the Fed buying stocks. We've seen it in Japan. We think the Fed is out of the stock game and purely in credit instruments due to their multiplier lending effect which trickles down to the consumer.
That Fed program of debt transactions, however, does have an incredible correlation and impact to stock market moves.
We will show you the numbers. It looks like that program has come to a halt and may turn lower whether they raise rates or not.
If that program turns lower, we'd expect the market to turn lower with it.
The following chart shows the size of the Fed's "balance sheet" and the change in that amount year-over-year through Open Market Operations in their SOMA division. The right column shows you the S&P 500 return (NYSEARCA:SPY) those years (Y-charts).
This chart is pretty incredible because the percentage amount that the Fed decided to build or reduce its positions almost precisely matched the stock market returns (Scroll back up to see for yourself). Ok, it wasn't perfect, but pretty close to tell you which way the market was going. You can see the data here.
So What's The Fed Doing Now? Buying or Selling?
Here's this year's weekly chart.
They've been net sellers. The number on the right is the cumulative change. The Fed has been net sellers since late April. It's been a few years since they've been net sellers and those years have recently been down years.
As far as stocks (equities), we didn't see any in their "balance sheet" assets. (See chart below)
Maybe they are hiding stocks "off balance sheet" but we don't think so.
There are a few line-items above that you may question could be equities but we think they are other forms of credit assets. Small point (1) above says, "securities lent to dealers under the overnight securities" and (10) says, "Revalued daily at current foreign currency exchange rates." Also (10) is not included in securities held "outright."
We don't think they are hiding equities here. And point 10 is a much smaller dollar amount than the overall quantity so even if it was equities (which we don't think it is) it is not the main driver holding stocks up today. And if they are equities, it doesn't make a difference because the overall balance sheet amount's change has enough correlation to tell us where stocks are going.
...We think. The market went up, no surprise, because of free money to banks and the multiplier effect of lending into the economy. That launched liquidity, spending, and stock purchases. But the Fed did not buy stocks, at least we don't think so.
But it doesn't really matter because the correlation of what we do know is very accurate making the stock question a moot point.
So Do Interest Rates Matter or Not?
So are you telling me interest rates don't matter and Fed funds rates aren't the main driver of the stock market? The main driver seems to be Fed balances, buys and sells. Whether they raise by 25bps or lower by 25bps may also be a moot point.
What are they doing with these open market operations? That's what matters.
So far they are selling. The selling picked up of late. We're not sure if there is anything to read into that or not.
The last few times we saw annual selling build to this small amount the market coincided with small short term peaks.
April 29th 2015
July 18th, 2012
May 30th, 2012
March 28, 2012
So is the Fed going to keep selling?
That's the real question. The question we have from here is that -.28% in the weekly chart going to turn around or is it going to keep going lower. Good question, right? That's really what matters, it seems.
We think the Fed is likely pretty happy with this balloon amount and isn't looking to increase it. We think that for two reasons. 1) It hasn't moved much for a while and 2) They are talking about tightening.
We will soon find out.
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