If QT Is Doing This, No Wonder Stocks Are Rallying

Authored by Simon White, Bloomberg macro strategist,

Quantitative tightening isn’t working. At least not in the way you’d expect it to, with central-bank reserves rising, not falling. On top of that, excess liquidity remains high and is increasing, while rates are becoming less restrictive. Stocks have thus been rallying, and will continue to experience tailwinds as long as liquidity conditions remain favorable.

Soft, hard or no landing?

When it comes to stocks, at least in the medium term, it matters little. What does matter is liquidity, and its recent rise explains one of the best November performances in the S&P over the past 90 years.

Liquidity conditions have been improving in three key ways:

1. central bank reserves,

2. excess liquidity,

3. and the restrictiveness of rates.

With no sign that any of them is about to turn much lower imminently, stocks will continue to enjoy supportive liquidity tailwinds once the current overboughtness has been worked out.

The rise in reserves is the most surprising. The Federal Reserve began QT in June 2022; since then, its balance sheet has contracted by more than $1 trillion to sit at just under $8 trillion. But reserves, which underpin deposits and the…