{"id":13042,"date":"2024-03-11T13:44:15","date_gmt":"2024-03-11T13:44:15","guid":{"rendered":"https:\/\/zacksim.com\/blog\/?p=13042"},"modified":"2024-03-11T13:44:16","modified_gmt":"2024-03-11T13:44:16","slug":"stock-market-dynamics-beyond-bonds-and-the-feds-influence","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/stock-market-dynamics-beyond-bonds-and-the-feds-influence\/","title":{"rendered":"Stock Market Dynamics Beyond Bonds And The Fed’s Influence"},"content":{"rendered":"\n

The Bond Market and the Federal Reserve Don\u2019t Control the Stock Market<\/strong><\/p>\n\n\n\n

In the years following the 2008 Global Financial Crisis, the Federal Reserve cut short-term interest rates to the zero bound and engaged in \u201cquantitative easing (QE)\u201d to apply downward pressure on long-term interest rates. To execute QE, the Fed bought long-term Treasurys and mortgage-backed securities in very large numbers, ballooning the central bank\u2019s balance sheet in the process. Popular thinking about these measures was that investors were forced into risk assets since yield was diminished in fixed-income markets.1<\/sup><\/p>\n\n\n\n

The Fed\u2019s Balance Sheet \u2013 Expands Throughout the 2010s, Soars in 2020<\/em><\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis2<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

Take a Look at Our March 2024 Market Insights<\/a><\/span><\/strong><\/p>\n\n\n\n

The Federal Reserve exerts some influence over the stock market, but not to the degree that economic and earnings fundamentals do. That\u2019s where investors should really focus their attention.<\/p>\n\n\n\n

Look no further than our March 2024 Stock Market Outlook<\/a><\/span><\/strong>, which provides the latest metrics and data points moving the markets and impacting your investment strategy.<\/p>\n\n\n\n

You\u2019ll gain access to detailed insights, such as:<\/p>\n\n\n\n

\u2022 The Importance of Asset Allocation
\u2022 Zacks Rank S&P 500 sector picks
\u2022 Current asset allocation guidelines
\u2022 Zacks forecasts for the months ahead
\u2022 Zacks Rank industry tables
\u2022 And much more!<\/em><\/p>\n\n\n\n

If you have $500,000 or more to invest and want ideas on how to invest in a strong market, click on the link below to get your free report today!<\/p>\n\n\n\n

IT\u2019S FREE. Download the March 2024 Stock Market Outlook3<\/sup><\/a><\/span><\/strong><\/p>\n\n\n\n

I\u2019m not saying this line of thinking is wrong. Easy money supercharged capital flows into stocks and other risk assets. Investors in search of yield had limited options in the bond markets, and massive amounts of liquidity meant more money was sloshing around in the capital markets. Much of it made its way into stocks.<\/p>\n\n\n\n

But the thinking that the Fed was the only reason<\/em> stocks did well in the 2010s and after 2020 is flawed, in my view. If this theory were true, it would mean quantitative tightening (QT) and rising interest rates would in turn be bearish for stocks, right? But that\u2019s not what we\u2019re seeing.<\/p>\n\n\n\n

The Fed\u2019s balance sheet peaked in April 2022 and has fallen by nearly $1.5 trillion since then. In that time, bond yields have also marched higher, with the 10-year U.S. Treasury bond moving from approximately 2.30% to its current 4.10%. So taken together, we have nearly two years\u2019 worth of quantitative tightening on the books, with bond yields nearly doubling in that time. This prolonged tightening period should have been treacherous for stocks. But it wasn\u2019t.<\/p>\n\n\n\n

We know that 2022 featured a bear market, but it ended in October of that year while QT, aggressive rate hikes, and rising bond yields were ongoing. As seen in the chart below (pay particular attention to the green box), the Fed\u2019s balance sheet (blue line) has been progressively shrinking \u2013 save for a brief uptick during regional bank stress \u2013 while the stock market (red line) has been rallying strongly.<\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis4<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

In 2024, bond yields have been moving modestly higher, which many would assume should factor as a negative for stocks. But stocks have managed to hit new all-time highs in the new year. The point to make once again is that falling bond yields and QE were not solely responsible for stocks\u2019 strong gains over the past 15 years or so, just like rising bond yields and QT should not prevent stocks from reaching new all-time highs.<\/p>\n\n\n\n

Bottom Line for Investors<\/strong><\/p>\n\n\n\n

The argument that the Fed and bond yields matter immensely to stock market performance is missing something glaring: the role of corporate earnings and economic growth. Aggregate S&P 500 earnings-per-share grew steadily from 2009 to 2015, contracted slightly, and then trended sharply higher up until the end of 2019. Aggregate EPS for S&P 500 companies more than doubled in this period, with profit margins reaching their highest point in decades by 2022. Zooming out even further, we know that year-over-year operating EPS growth averaged 7.1% from 2001 to 2022, which is almost perfectly in line with the S&P 500\u2019s 7.01% annualized return over that same period.5<\/sup> In short, stocks were propelled by much more than just the Fed and will continue to be as QT continues, in my view.6<\/sup><\/p>\n\n\n\n

For further market insights, I recommend downloading our March 2024 Stock Market Outlook Report7<\/sup><\/a><\/span><\/strong>, which contains some of our key forecasts to consider, such as:<\/p>\n\n\n\n

\u2022 Zacks Rank S&P 500 sector picks
\u2022 Current asset allocation guidelines
\u2022 Zacks forecasts for the months ahead
\u2022 Zacks Rank industry tables
\u2022 Buy-side and sell-side consensus at a glance
\u2022 And much more!<\/em><\/p>\n\n\n\n

If you have $500,000 or more to invest and want to learn more about our market forecasts for 2024, click on the link below to get your free report today!<\/p>\n","protected":false},"excerpt":{"rendered":"

The stock market’s success isn’t solely dictated by bond markets and the Federal Reserve \u2013 here\u2019s why<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-13042","post","type-post","status-publish","format-standard","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/13042","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=13042"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/13042\/revisions"}],"predecessor-version":[{"id":13046,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/13042\/revisions\/13046"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=13042"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=13042"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=13042"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}