So, according to the theses, let's briefly go through the US economy's current state. GDP has been falling for two quarters in a row. Inflation remains very high. The probability of a recession is high. The Fed continues to tighten monetary policy very aggressively. The QT (quantitative tightening) program has been in effect since June, expanding to $95 billion monthly from September 1. Raising the key rate is the most important among the above points for the US currency. But for stock indices and stocks, all the points are important.
To begin with, the higher the inflation, the higher the demand for the most profitable assets. And when the Fed is struggling with high inflation, the demand for the most profitable and safe assets is growing. Treasury bonds, not stocks, are considered a risky investment tool. GDP has been falling for two quarters in a row, which means that companies' profits and production volumes are gradually decreasing. The latest financial statements showed more positive results for 75% of companies than expected, but this does not mean that the situation will not worsen in the future. The Fed is raising the rate and is preparing to withdraw almost $100 billion from the economy every month from the beginning of next month. It means there will be less money to invest in the economy, and investment conditions will worsen every month. We think so.
Bank of America experts share approximately the same opinion. They analyzed how the S&P 500 index grew from 2010 to 2019 during the QE program and concluded that the QT program would have to lead to a drop in this index by at least 7% if it operates until the end of 2023. And this is without considering the increase in the Fed's key rate. At the moment, quantitative tightening has receded into the background, as the fear of the onset of recession and worries about high inflation have overwhelmed the markets. However, in the conditions of falling economic growth, the reduction of the Fed's balance sheet may come to the fore, the bank believes. They also stated that the more the Fed rate increases, the higher the value of the QT program, which increases with a higher rate. Bank of America also said that while the market is happy, the Fed will raise the rate at the next meeting by only 0.5% (although there were no specific signals in favor of this) and does not pay attention to the QT program. But it won't always be like this. The Fed minutes will be published tonight, which may be important for the markets as they may contain information about decisions that may be taken at the next meetings.
