scorecard
  1. Home
  2. stock market
  3. news
  4. A pivot on the Fed's balance sheet reduction plans could be a bullish driver of stocks next year. Here's what to know.

A pivot on the Fed's balance sheet reduction plans could be a bullish driver of stocks next year. Here's what to know.

Max Adams   

A pivot on the Fed's balance sheet reduction plans could be a bullish driver of stocks next year. Here's what to know.

Good morning. Welcome back from the weekend. I'm senior editor, Max Adams.

Interest rates are getting all the attention these days, but there are other Fed moves going on in the background that investors need to be aware of.

Today, we're looking at something that could be an important bullish driver of stocks next year. We're talking about QT. No, not quantitative tightening, but rather quantitative tinkering.

Let's see what's going on.


If this was forwarded to you, sign up here. Download Insider's app here.


1. Don't forget about the Fed's massive balance sheet. Remember quantitative tightening? It seems like it doesn't get that much attention amid the talk of interest rate increases, but recall that the US central bank last month began reducing its $9 trillion balance sheet in a feared double-whammy of monetary tightening alongside its aggressive rate hikes.

Well, similar to how investors these days are hoping and praying for a Fed "pivot" to save their struggling portfolios, there's a chance a pivot on the balance sheet front could also be a boon for stocks, according to Bank of America.

While rate hikes are tightening conditions and sucking some money out of the system, the Fed's quantitative tightening to the tune of $95 billion a month could disrupt markets by cutting off a big source of liquidity.

BofA's Michael Hartnett says that the central bank is "petrified" of a strongly negative market reaction to this change in liquidity conditions, and that any sign of stress could lead it to "tinker" with its balance sheet reduction plans.

Similar to how investors believe a Fed pivot on rate hikes can deliver them from a brutal bear market, BofA says that quantitative tinkering (i.e. changing the pace or even pausing balance sheet reduction) would also be a bullish development.

But it wouldn't be the end of stock-market pain. That's because there's still no sign of capitulation from investors, who the bank observed piling about $9 billion into stocks in the previous week. Until investors throw in the towel, the market bottom isn't in yet and more volatility lies ahead.

"Still no final capitulation in equity flows," Hartnett said. "We're bearish despite ubiquitous bear sentiment."

When does the Fed pivot from its rate hike and balance sheet reduction plans? Email madams@insider.com.


In other news:

2. Dow and S&P futures are up early Monday, but the Nasdaq is lagging as the likes of Alibaba sink. Xi's weekend power play also sent Hong Kong stocks to a 14-year low. Here are the latest market moves.

3. Earnings on deck: Discover Financial Services, Logitech International, HSBC, all reporting.

4. Here's how to invest to protect your portfolio from inflation and higher rates. Goldman Sachs details how investors can approach every sector of the market as macro volatility hammers stocks. Get the bank's top tips here.

5. The housing market will deteriorate more quickly, as the effect of rising rates has yet to be fully realized. That's according to Goldman Sachs. The bank said in a note last week that September home sales data didn't capture the recent move upward in mortgage rates. Get the full view here.

6. Russia could evade a G7 plan to cap oil prices. A Treasury official told Reuters that the focus now is to mitigate self-harm done to Western countries by any sanctions on Russian energy. Here's how Russia could still end up selling 90% of it crude after the cap kicks in.

7. The Fed is "playing with fire," Jeremy Siegel said. In an interview with CNBC on Friday, the Wharton professor said that the US central bank is aiming way too high with its rate hikes. But Siegel says he's still a buyer of stocks over bonds.

8. A real estate investor who is financially independent via his 25-unit portfolio shares his best tips. A former police officer built a portfolio of income generating properties in four years with almost no knowledge of real estate investing. Here is his top advice for rookie investors looking to get into the property market.

9. Here's where stock market investors want to be as signs of a powerful rally start to form. The research chief at the $74 billion Nationwide Funds says there's reason to be optimistic even as macro volatility poses big challenges. These are his picks for the three sectors with the best upside potential in any coming rally.

10. Snap plunged on Friday. Shares plummeted 28% after poor earnings results for the third quarter. The company's earnings sparked fears about broader weakness in upcoming tech earnings from big names like Meta and Alphabet due out this week. Read the latest here.


Keep up with the latest markets news throughout your day by checking out The Refresh from Insider, a dynamic audio news brief from the Insider newsroom. Listen here.


Curated by Max Adams in New York. Feedback or tips? Email madams@insider.com.

Edited by Hallam Bullock (@hallam_bullock) in London.



Popular Right Now



Advertisement