Highflying U.S. stocks could be headed for an uncomfortable descent as the wash of central-bank liquidity that has given equity markets a boost this year begins to ebb, according to one longtime Wall Street strategist.
See: The secret to stocks’ success so far in 2023? An unexpected $1 trillion liquidity boost by central banks. All told, the Federal Reserve’s support for banks via the discount window and an emergency-lending program, coupled with drawdowns in the U.S. Treasury General Account earlier this year as taxpayers received their refunds, have added some $440 billion in liquidity support for stocks in the span of little over a month.
“In many respects, the price action feels QE-like, in particular the low levels of daily volatility in equities,” King said. “I think there is a very good reason for that.” The Fed’s emergency lending to banks through the discount window and the Bank Term Funding Program cause Fed reserves to swell. Meanwhile, on the other side of the ledger, changes in the size of the Treasury General Account and the Fed’s overnight reverse-repo facility cause reserves to shrink since they are liabilities, not assets.