What to expect from stocks once Fed starts to shrink balance sheet?

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U.S. equities held their ground in March even after the central bank started raising rates. But that could change, as per Josh Brown, once the Fed begins shrinking its $9.0 trillion balance sheet.

Brown’s comments on CNBC’s ‘Halftime Report’

Brown expects quantitative tightening to be a negative catalyst for the stock market. Historically, the S&P 500 index tends to take a hit when the U.S. Fed turns to reducing the size of its balance sheet, he added on CNBC’s “Halftime Report”.

Shrinking the balance sheet is really what gave us the double-barreled corrections in 2018. This is similar, only instead of trade war, it is supply chain related inflationary pressure and labour market inflationary pressure, but it’s the same concept.

The Federal Reserve has already indicated that it plans on shrinking its balance sheet by as soon as May.

Could SPX still hit 5,000 by year end?

The CEO of Ritholtz Wealth Management is still open to the idea that the benchmark could close the year just north of 5,000, but reiterated caution as the ride to that level will likely be bumpy. He noted:

That’s just the map showing where you’re going. That does very little to describe what the terrain will be like to get to that year-end target. And the terrain is where most people get tripped. Not everybody gets to make it to the finish line undamaged.

The marginally above 5,000 year-end target also stems from historical data that suggests the SPX have a year of mid-single-digit growth after three consecutive years of a bull market.

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