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S&P 3500 By Year End If QT Continues

"Don’t Fight the Fed" echoes through the financial media, Wall Street, and in the minds of retail and institutional investors. The phrasing pertaining…

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“Don’t Fight the Fed” echoes through the financial media, Wall Street, and in the minds of retail and institutional investors. The phrasing pertaining to Fed-generated liquidity is often the sole basis for investors to chase bull markets when the Fed employs easy monetary policy. Unfortunately, some investors forget the phrase is equally meaningful when the Fed is not friendly to markets. As we share in this article, we have developed a model to track Fed liquidity, allowing us to quantify the Fed’s influence on the S&P 500.

Before unveiling our liquidity formula and its forecast for the S&P 500, it’s essential to discuss the three primary drivers by which the Fed is influencing liquidity: Reverse Repurchase (RRP), Treasury General Account (TGA), and the Fed’s balance sheet.

Reverse Repurchase Agreements (RRP)

The New York Fed uses numerous repo programs to manage the supply of cash in the banking system, thereby maintaining the Fed Funds rates within the FOMC’s target range. Currently, they are employing its RRP program to accomplish this task. In an RRP transaction, the Fed sells securities to a counterparty and simultaneously agrees to repurchase them at a future date. The duration is often overnight. The transaction temporarily reduces the supply of money from the banking system. Increasing daily RRP balances results in less system liquidity, and a declining balance reduces liquidity.

As shown below, RRP has been around for 20 years but was scarcely used until early 2021. The various pandemic-related rounds of fiscal stimulus and massive Fed liquidity efforts left banks and money market funds with excessive levels of cash. The excess liquidity would have pushed the Fed Funds rate lower than the target rate without the RRP program. As such, RRP sucks up liquidity, making Fed Funds easier for the Fed to manage.

The Fed has other repo tools, such as repurchase agreements and the standing repo facility, which can dampen money market rates by providing the banking system with liquidity.

The RRP facility has been increasing rapidly and now sits at over $2 trillion daily. Rising RRP balances are a drain on liquidity.

As money market yields rise with Fed Funds and asset markets perform poorly, investors tend to prefer higher cash balances. Such should keep RRP levels elevated for the time being.

Treasury General Account (TGA)

The Treasury General Account is the U.S. Treasury Department’s checking account. The account is held at the Federal Reserve Bank of New York. Like your checking account, the TGA receives deposits (tax receipts and proceeds from debt issuance) and makes payments.

The Fed doesn’t manage the TGA balances, but the surplus cash balance held at the Fed affects banking system liquidity. Fed liabilities (bank reserves) must equal its assets. Bank reserves are fodder allowing banks to make loans and, by default, print money. When the TGA account increases, bank reserves must fall, reducing banking system liquidity. Conversely, a shrinking TGA account adds reserves and liquidity to the banking system.

The graph below shows that TGA balances are elevated versus the pre-pandemic years but have fallen as the banking system normalizes from the massive fiscal cash injections. It will likely drop a bit more, but the TGA will not significantly impact liquidity, barring unusual circumstances.

tga account

Fed Balance Sheet

The Fed’s assets, mainly Treasury bonds and Mortgage-Backed Securities (MBS), are the liquidity elephant in the room. Its assets currently account for 75% of total Fed-sponsored liquidity and historically average over 90%.

When the Fed does Quantitative Easing (QE), they remove securities from the bond markets and, in their place, leaves reserves with the banks. Again, bank reserves can lead to loan creation which is the creation of new money. Ergo, QE adds to the system’s liquidity. Conversely, Quantitative Tightening (QT) removes liquidity and reserves from the system and increases the amount of securities in the market.

For this reason, QE tends to be bullish for stocks, and QT is bearish. 

Liquidity and Stock Prices

With an understanding of the three key factors driving banking system liquidity, we can create a Fed liquidity model. The size of the Fed’s assets less the sum of the TGA and RRP equals the amount of Fed-generated liquidity in the system. Recent changes in net liquidity shed light on how the S&P 500 trends.

The two graphs below compare the liquidity measure and the S&P 500. The first graph shows how the S&P 500 rose in line with liquidity through 2021, and both reversed simultaneously to start 2022. The dotted lines are quarterly moving averages to help smooth out the data. The moving averages track each other almost perfectly this year. The green dashed line forecasts liquidity based solely on the Fed’s plan to reduce its balance sheet by $95 billion a month. The S&P 500 could be close to 3500 by year-end if they follow through with their QT plans and the correlation holds up.

The second graph shares the same data but in scatter plot form. The correlation between liquidity and the S&P 500 is statistically significant, with an R-squared of 0.57. The orange dot shows the S&P 500 is about 3% overpriced based on liquidity.

liquidity Fed
liquidity S&P 500

The model does have an important caveat. Other factors become the predominant driver of market returns when the Fed is inactive and liquidity is relatively stable.  

Summary

The Fed is not the only game in town, but they are the biggest game in town. While many other factors account for stock price performance, liquidity may be the most important to grasp.

To drive home this point, recall March 2020, when covid struck the economy. Global economies were shutting down worldwide. Unemployment was soaring, and the economy was careening toward a depression. Despite zero clarity on the economic future, stocks began to rally strongly in late March. Why? Liquidity via fiscal stimulus and a surge in Fed QE purchases drove markets higher. The economic situation was awful, and earnings outlooks were crumbling, but liquidity trumped fundamentals. 

By accepting what the Fed does, right or wrong, and closely following its actions, we can quantify how liquidity will steer markets. On top of fundamental and technical analysis, this additional layer of research helps us better navigate the market’s twists, turns, and trends when the Fed is active.

The post S&P 3500 By Year End If QT Continues appeared first on RIA.

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Economics

Here’s Why Your Boss May Reject Your Business Travel Request

People are taking vacations again, but a once dominant travel sector is struggling to recover.

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People are taking vacations again, but a once dominant travel sector is struggling to recover.

Now that vaccines are readily available and President Joe Biden has declared that the pandemic is officially over, people are flying again. But they’re really not happy about it.

The research firm J.D. Power found that last year, when the airline industry first started to cautiously rebound, consumer satisfaction with airports reached an all-time high. But this was very likely both because of a relatively smaller sample size and that so many people were happy to fly again that they were willing to overlook a lot of what has become headache-inducing about modern airfare travel.

J.D. Power  (JD) - Get JD.com Inc. Report has found that this year, global passenger levels are nearly back up to 91% of pre-pandemic levels. 

Customer satisfaction has dropped sharply, 25 points on a 1,000-point scale, to 777, as more people have returned to airports, for reasons ranging from an increase in flight cancellations and delays to inflation-driven increases in the cost of airport food.

But while airlines are aware that customers aren’t happy, and that the Biden Administration might try to right the ship with proposals that airlines likely won’t care for, at least people are flying again.

But an additional survey by J.D. Power has revealed that while people are flying again, traveling for business (be it for in-person meetings or industry conferences), has been lagging behind and recovering at nearly the rate of traveling for pleasure. 

Is Traveling for Business on the Way Out?

J.D. Power’s research has found that many travelers doubt that travel levels will increase dramatically from where they are now, and that “a strong majority of executives believe their companies will spend less in the next six months compared to the same period in 2019, for instance, due to things like fewer trips overall or fewer employees sent when there is a trip scheduled,” according to their data.

Overall, business travel has returned to “about 81% of 2019 levels,” notes Managing Director Michael Taylor. “83% was our prediction for this quarter, we’ll see how well we did in a few weeks and add a predication for Q4.”

J.D. Power

Fears of recession and the rising costs of air tickets from inflation play a factor in the decline of business travel. But overall, the main reason is that many of us have gotten so used to working at home that two-thirds of employees would rather find a new job than go back to the pre-pandemic status quo. If employees feel they can get work done from home and don’t feel like braving traffic to return to the office, why would they feel they need to get on a plane?

So have services like Zoom (ZM) - Get Zoom Video Communications Inc. Report and Slack made the business trip redundant? Taylor has his doubts.

“But will people be meeting exclusively in the 'Metaverse' rather than in person? I do not think that will happen,” he says. “There is too much information to be gathered in face-to-face meetings, spoken and unspoken, to be replaced completely by virtual ‘reality.’”

Getty Images

So is This It for Business Travel?

Back in the heady pre-pandemic days three years ago, airlines could rely on the extra income from people whose jobs entailed a great deal of travel, and who had come to the realization that if they were going to spend a chunk of their lives on the road, they could splurge to make it a more comfortable experience. 

But if airlines want this sector to return, Taylor thinks it’s their duty to make it a more appealing option, because frequent delays and other headaches are enough to make anyone stick to Zoom.

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Airlines, Taylor says, must “create more of a “living room” experience for travelers, one that “makes travelers feel valued as patrons of the airlines, and makes people feel like individuals rather than cattle.”

Because while it’s hard to argue with the convenience, Taylor insists there is still something to be said for the occasional in-person meeting. 

“Millenia of evolution in mankind has created an awareness that can’t be described with words on a page or pixels on a screen,” he says. “People will still find advantages in meeting in-person rather than online.”

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Economics

BOEHRINGER INGELHEIM DONATES NEARLY 100,000 PET VACCINE DOSES TO HELP ELIMINATE RABIES AROUND THE WORLD WITH RELAUNCH OF SHOTS FOR GOOD(SM) INITIATIVE

BOEHRINGER INGELHEIM DONATES NEARLY 100,000 PET VACCINE DOSES TO HELP ELIMINATE RABIES AROUND THE WORLD WITH RELAUNCH OF SHOTS FOR GOOD(SM) INITIATIVE
PR Newswire
DULUTH, Ga., Sept. 28, 2022

In recognition of World Rabies Day on September 28, the d…

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BOEHRINGER INGELHEIM DONATES NEARLY 100,000 PET VACCINE DOSES TO HELP ELIMINATE RABIES AROUND THE WORLD WITH RELAUNCH OF SHOTS FOR GOOD(SM) INITIATIVE

PR Newswire

In recognition of World Rabies Day on September 28, the donation is for use on tribal lands and underserved communities in collaboration with Greater Good Charities

DULUTH, Ga., Sept. 28, 2022 /PRNewswire/ -- Boehringer Ingelheim, a global leader in veterinary rabies vaccines, has expanded its commitment to help prevent rabies in dogs by donating nearly 100,000 doses of rabies vaccine. The donation is part of the relaunched SHOTS FOR GOOD℠ program and will be used on tribal lands and in underserved communities across the United States.

Rabies is a zoonotic, viral disease, which can be transmitted through wild animals and pets. Once clinical symptoms appear, rabies is virtually 100% fatali. Even though it is vaccine-preventable, around 59,000 people still die from rabies every year globallyii. Rabies is present on all continents, except Antarctica, with over 95% of human deaths occurring in the Asia and Africa regionsiii. It can pose a significant risk anywhere if dogs are not vaccinated. Dogs are the main source of human rabies deaths, contributing up to 99% of all rabies transmissions to humansiv.

"Boehringer Ingelheim fervently believes no animal should suffer from a preventable disease," said Dr. Julie Ryan-Johnson, head veterinarian for shelters at Boehringer Ingelheim and board vice chair for Greater Good Charities. "Together with Greater Good Charities we can fight the presence of rabies on tribal lands and in underserved communities to keep pets healthier and happier for longer."

Boehringer Ingelheim Animal Health established the SHOTS FOR GOOD initiative in 2019 in Puerto Rico and underserved communities in California, Nevada, Oklahoma, Texas, North Carolina, Louisiana, Mississippi, and Florida. However, in 2020, the initiative was suspended due to global pandemic restrictions.

Since relaunching the program earlier this year, and in collaboration with the global nonprofit, Greater Good Charities, the program has enabled vaccination clinics throughout tribal lands in Alaska, Arizona, Colorado, Montana, and Utah. Additional vaccines have been utilized in Hawaii as part of Greater Good Charities' Good Fix program which offers high-quality, high-volume spay/neuter to help control pet overpopulation in underserved communities.

"In observance of World Rabies Day, we recognize the positive impact of vaccination events to raise awareness about rabies and how to prevent this deadly disease," said Denise Bash, vice president at Greater Good Charities. "The generous vaccine donations from Boehringer Ingelheim Animal Health and the Shots for Good initiative helps to protect pets while making this important effort possible."

About World Rabies Day

World Rabies Day, held every year on September 28, is observed by the United Nations as an International Day. Coordinated by the Global Alliance for Rabies Control, it is a day to raise awareness about rabies and how to prevent this deadly disease. Hundreds of events are held by organizations and individuals around the world in recognition of this day.

About Boehringer Ingelheim

Boehringer Ingelheim Animal Health is working on first-in-class innovation for the prediction, prevention, and treatment of diseases in animals. For veterinarians, pet owners, farmers, and governments in more than 150 countries, we offer a large and innovative portfolio of products and services to improve the health and well-being of companion animals and livestock. As a global leader in the animal health industry and as part of family-owned Boehringer Ingelheim, we take a long-term perspective. The lives of animals and humans are interconnected in deep and complex ways. We know that when animals are healthy, humans are healthier too. By using the synergies between our Animal Health and Human Pharma businesses and by delivering value through innovation, we enhance the health and well-being of both.

Learn more about Boehringer Ingelheim Animal Health USA Inc. at bi-animalhealth.com  

About Greater Good Charities

Greater Good Charities is a 501(c)(3) global nonprofit organization that works to help people, pets, and the planet by mobilizing in response to need and amplifying the good. Greater Good Charities, with a 100/100 rating on Charity Navigator, has provided more than $475 million in impact, including cash grants, in-kind supplies, and programmatic support, to charitable partners in 121 countries since 2007. To learn more about how Greater Good Charities amplifies the good across the globe, please visit greatergood.org.

Media Contact:
Chrissy Jones
Boehringer Ingelheim Animal Health
U.S. Communications
(516) 527-5456
christine.jones@boehringer-ingelheim.com 

REFERENCES

i World Health Organization: Rabies (who.int) (downloaded: April 1, 2022)
ii World Health Organization: Oral rabies vaccine: a new strategy in the fight against rabies deaths (who.int) (downloaded: April 1, 2022)
iii World Health Organization: Rabies (who.int) (downloaded: April 1, 2022)
iv World Health Organization: Rabies (who.int) (downloaded: April 1, 2022)

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SOURCE Boehringer Ingelheim

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Economics

Cambridge Bancorp Announces Receipt of Regulatory Approvals to Merge with Northmark Bank and Anticipated Closing Date

Cambridge Bancorp Announces Receipt of Regulatory Approvals to Merge with Northmark Bank and Anticipated Closing Date
PR Newswire
CAMBRIDGE, Mass., Sept. 28, 2022

CAMBRIDGE, Mass., Sept. 28, 2022 /PRNewswire/ — Cambridge Bancorp (NASDAQ: CATC), th…

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Cambridge Bancorp Announces Receipt of Regulatory Approvals to Merge with Northmark Bank and Anticipated Closing Date

PR Newswire

CAMBRIDGE, Mass., Sept. 28, 2022 /PRNewswire/ -- Cambridge Bancorp (NASDAQ: CATC), the parent company for Cambridge Trust Company ("Cambridge Trust"), today announced all regulatory approvals relating to the proposed merger between Cambridge Trust and Northmark Bank have been received. The shareholders of Northmark Bank approved the merger at a special meeting held on August 31, 2022.  The anticipated closing date of the merger is October 1, 2022, subject to the satisfaction of other closing conditions.

About Cambridge Bancorp

Cambridge Bancorp, the parent company of Cambridge Trust Company, is based in Cambridge, Massachusetts. Cambridge Trust Company is a 132-year-old Massachusetts chartered commercial bank with approximately $5.1 billion in assets at June 30, 2022, and a total of 19 Massachusetts and New Hampshire locations. Cambridge Trust Company is one of New England's leaders in private banking and wealth management with $4.0 billion in client assets under management and administration at June 30, 2022. The Wealth Management group maintains offices in Boston and Wellesley, Massachusetts and Concord, Manchester, and Portsmouth, New Hampshire.

Forward-looking Statements 

Certain statements herein may constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements about the Company and its industry involve substantial risks and uncertainties. Statements other than statements of current or historical fact, including statements regarding the Company's future financial condition, results of operations, business plans, liquidity, cash flows, projected costs, the impact of any laws or regulations applicable to the Company, and measures being taken in response to the COVID-19 pandemic and the impact of the COVID-19 pandemic on the Company's business are forward-looking statements. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "plans," "projects," "may," "will," "should," and other similar expressions are intended to identify these forward-looking statements. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. Such factors include, but are not limited to, the following: the businesses of Cambridge and Northmark may not be combined successfully, or such combination may take longer to accomplish than expected; the cost savings from the merger may not be fully realized or may take longer to realize than expected; operating costs, customer loss and business disruption following the merger, including adverse effects on relationships with employees, may be greater than expected; changes to interest rates; the ability to control costs and expenses; the current global economic uncertainty and economic conditions being less favorable than expected; disruptions to the credit and financial markets; changes in the Company's accounting policies or in accounting standards; weakness in the real estate market; legislative, regulatory, or accounting changes that adversely affect the Company's business and/or competitive position; the Dodd-Frank Act's consumer protection regulations; the duration and scope of the COVID-19 pandemic and its impact on levels of consumer confidence; actions that governments, businesses and individuals take in response to the COVID-19 pandemic; the impact of the COVID-19 pandemic and actions taken in response to the pandemic on global and regional economies and economic activity; a prolonged resurgence in the severity of the COVID-19 pandemic due to variants and mutations of the virus; the pace of recovery when the COVID-19 pandemic subsides; disruptions in the Company's ability to access the capital markets; and other factors that are described in the Company's filings with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the year end December 31, 2021, which the Company filed on March 14, 2022. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. You are cautioned not to place undue reliance on these forward-looking statements.

CONTACT:
Cambridge Bancorp
Michael F. Carotenuto
Chief Financial Officer
617-520-5520

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SOURCE Cambridge Bancorp

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