March 21, 2023
The debate over whether the Fed hikes by 25bp or decides to pause at tomorrow’s meeting seems less important when you consider that an estimated $440B of its BTFP facility has already been utilized. That amount effectively reverses 6 month’s of the Fed’s QT operation or more than 30% since QT started at the end of 2021. The temporary BTFP facility is a liquidity injection similar to QE, which tends to benefit long duration growth stocks you’d find in the Nasdaq 100 (NDX). The biggest sector beneficiaries from the four major QE cycles were Consumer Discretionary and Tech.
Liquidity issues at US regional banks and associated future regulatory actions have already impaired bank capital creation. The dynamic will put downward pressure on the economy and inflation. The potential for unknown risks to emerge will remain elevated for the foreseeable future and a Fed-engineered soft landing seems unlikely.
Given the fundamental backdrop, the current advance in the S&P 500 (SPX) is more likely to be another bear market rally rather than the start of a new bull market. The recent rally has been driven by a dovish repricing of 24-month forward rates to 2.75%. This is very close to the Fed’s so-called neutral rate of 2.50%, which means the good news is priced in. Near-term technical resistance sits in this 3950-4000 range. A break above 4000 would likely take the index into the 4100s, which has been strong technical resistance for the index.