Stocks in record territory QT “wealth effect” recession

 ‘This is what happens coming into a recession,’ ‘Everything looks fine, and suddenly it’s not.’

QT  shrinking of the Fed’s balance sheet, which swelled to almost $9 trillion during the pandemic  to about $8.3 trillion as bonds mature.

As a counterweight, there’s the “wealth effect,” suggesting that households become richer as higher stock prices climb, boosting spending. 

Low pandemic rates also encouraged a borrowing blitz by homeowners and corporations. Those long-term, fixed costs provide a huge buffer from the Fed’s rate hikes since 2022.

Still, rising rates (blue line) and tighter financial conditions typically don’t bode well for stock portfolios, with most tightening cycles resulting in recessions (gray lines) since 1970.

MarketWatch 23 July 2023

https://www.marketwatch.com/story/stocks-are-making-a-run-for-record-territory-will-the-fed-end-its-rate-hikes-anyway-31f80662

Dow looks to extend winning streak

The surge reflects hopes that cooling inflation will allow central banks to soon stop their rate rise campaigns and that any economic downturn caused by the monetary tightening will not impact corporate profits too badly.

MarketWatch 24 July 2023

https://www.marketwatch.com/story/dow-looks-to-extend-winning-streak-as-central-bank-decisions-and-raft-of-earnings-loom-8a129873