S&P 500 could drop 7.0% on Fed’s QT through 2023 – BofA

The winding down of the central bank’s balance sheet poses a risk to equity prices, according to Bank of America (BofA), reported Bloomberg late Monday.

“When looking at the historical relationship between the Fed’s bond purchases and S&P 500 returns from 2010 to 2019, the bank concluded in a research note on Monday that quantitative tightening through 2023 would translate into a 7% drop in the benchmark gauge from current levels,” the bank report also mentioned.

BofA also mentioned, per Bloomberg, “Quantitative Easing (QE) has explained more than 50% of the movement in the market.”

Bloomberg also quotes Chief Investment Officer at Independent Advisor Alliance as saying, “Quantitative Tightening (QT) has undoubtedly taken a back seat to more pressing issues such as inflation and recession angst.”

Key quotes (from Bloomberg)

The Fed started winding down its $8.9 trillion balance sheet in June and is phasing in the reductions to an eventual pace of $1.1 trillion a year. In the two months since, the S&P 500 has gained 4.8%.

A new study by a Federal Reserve Bank of Atlanta economist found that asset reductions will have a relatively modest impact on the economy compared to the Fed’s raising of interest rates to fight inflation, equating the effect over time to no more than three quarter-point interest-rate hikes.

Also read: Modest losses prevail in stocks