The US Federal Reserve balance sheet had grown to over 4.5 trillion US Dollars at it’s peak and over the years had an immense – probably NOT unintended – impact on US equity markets.
Since the balance sheet’s peak levels in January 2015 it shrunk by 129 billion US Dollars as of early April 2018, a mere drop in the bucket considering the breathtaking amounts of money that were pumped into the markets (it might not be appropriate to say “into the economy”) with the various rounds of QE.
With the reversal in monetary policy gradually revealing the first cracks in the stock market, I wanted to explore by how much the current S&P 500 index is approximately inflated through US Fed money supply, demonstrating the immense equity downward potential if the monetary accommodation would be removed (in theory). The result of my calculation: would the Fed balance sheet brought back to zero, the S&P 500 index could easily drop by 64% from it’s current level.
Today’s market seems akin to a drug addict in need of a slight but constant increase of his daily dose just in order to remain “happy”. In the very near future, not only will the dose not increase further, but the drugs are about to be taken away entirely, throwing him straight into cold detoxification.
