Too Much or Not Enough?

Weekly Market Update | April 11, 2022

Highlights

The MSCI AC World Index pulled back last week – falling 1.5% as global bonds yields pushed higher. In the United States, the S&P 500 dropped 1.5% while the interest-rate sensitive NASDAQ tumbled 3.9%. The Dow Jones slipped just 0.3% as Value stocks outperformed Growth stocks. European stocks fell 0.8% while Japanese stocks dipped 3.7%. The 10-year U.S. Treasury yield rocketed higher – jumping 32 basis-points – as the Fed signaled a fast pace for balance sheet runoff.

The minutes of the Federal Reserve’s March 16th meeting showed that the Fed intends to allow its balance sheet to runoff at a rate that is double the pace witnessed between 2017 – 2019. If the Fed decides to reduce its securities holdings by $95 billion per month, it will still take the Fed over four years to shrink the balance sheet to pre-pandemic levels.

A former Fed official wrote an opinion piece suggesting that the Fed may need to force U.S. stocks to fall in order to sufficiently weaken financial conditions. However, during the last seven Fed tightening cycles, the S&P 500 was higher at the end of the tightening cycle than at the beginning. A better “sell signal” may be when the Fed decides to stop raising rates with U.S. recessions tending to occur roughly 9-12 months after the Fed ends rate hikes.