Market performance trajectories and the Fed's balance sheet are strongly correlated. Total assets on the Fed's balance sheet have expanded from US$2.24 trillion at the end of 2008 to the current level of around US$7.7 trillion, representing growth of 244%, while the S&P 500 rose from 903.25 to approximately 3,900 points, achieving cumulative growth of around 330% over the same period. (see Chart 1).

It's true, the numbers aren't exactly the same, but look at what happened during the pandemic, when profits fell and all the return on equities was explained by the expansion of multiples. The Fed's balance sheet has grown from $4.67 trillion on March 18, 2020 (a week before the market bottomed out) to $7.7 trillion, a 65% increase, while the S&P 500 has risen 64% over the same period. That does look similar, doesn't it?

Since mid-February of this year, equity markets have struggled to sustain their upward trend amid a rapid rise in sovereign yields that has tested high market valuations, but also amid lower liquidity provided by major central banks. (see Chart 2)

It is not that asset purchases have stopped (G-10 central banks are expected to purchase around US$300 billion per month in 2021), but the pace of these purchases has slowed. How long will this last? Not long, we expect, as central banks have become increasingly sensitive to liquidity adjustments and how they impact prices.

For example, three buttons: 

Two weeks ago, the European Central Bank (ECB) indicated that it would purchase more debt so that rising interest rates would not stifle the recovery, and it is not that the size of the purchase program has increased (at least not for now), but rather that the pace of these purchases will increase. 

Chinese stocks have struggled this year due to regulatory issues, but also because of growing expectations of a more restrictive monetary policy. China has not been as conservative in its cash offerings to banks in almost a year, and the People's Bank of China has avoided net injections of short-term liquidity into the financial system since late last month, raising concerns that access to funds is becoming increasingly difficult. How long will this last? After a 15% drop in Chinese stocks since mid-February, probably not much longer.

Japanese stocks saw widespread selling in recent days after the Bank of Japan (BOJ) signaled last week that it is eliminating its annual stock purchase target. And surprise! The BOJ had to return to the market more aggressively to buy a record amount of shares (70 billion) and halt the decline (which it has managed to do so far).