Chart of the Month (January 2023)
Last year proved to be a volatile period for financial markets. The markets are off to a better start in 2023, but we remain cautious. We believe we will continue to see heightened volatility and economic uncertainty over the course of the year. Communication is of the utmost importance in this type of environment. Therefore, the team at JPS Financial will be providing a monthly chart depicting what we believe to be some of the most relevant investment and economic topics. We will provide a description of each chart as well as our thoughts concerning investment strategy implications. Please see the Chart of the Month for the month of January below.
Chart Description
- This chart shows the relationship between the Federal Reserve’s Balance Sheet and the S&P 500 Index
- The Fed’s balance sheet (purple line) grows as it injects liquidity into the banking system, and it shrinks as it removes liquidity
- The Fed’s balance sheet grew from approximately $900 billion pre-great financial crisis to just under $9 trillion in April 2022
- There appears to be a positive correlation between the Fed’s balance sheet growth, as it provides liquidity and lowers interest rates, and the performance of the stock market
Our take
The officials at the Federal Reserve have put themselves in a very difficult position. If they continue to remove liquidity from the banking system, as they started in May 2022, the market and the economy will likely experience additional downward pressure in 2023. However, if they reverse course and begin injecting more liquidity, they run the risk of inflation getting out of control. We believe that the Fed is stuck between a rock and a hard place. We think there is a good chance that the economic pressure will build to a point where they will try to become accommodative once again. Unfortunately, we don’t think they’ll be able to have as great of an influence as what we saw in 2008 and March of 2020 given the fact that the balance sheet is still over $8.5 trillion.
JPS Financial, LLC is registered as an investment adviser with the SEC. All information is believed to be current and should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. All investments and strategies have the potential for profit or loss.
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