Morgan Stanley: Here's S&P 500 Impact of Fed Balance Sheet Cuts
- Quant model reveals linkage between stocks and MBS reductions
- S&P 500 seen falling 3.3% in 2019 based on recent MBS runoff
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With the stock market fixated on the Federal Reserve’s balance sheet, Morgan Stanley analysts built a quantitative model to assess the impact. And they found the extent of the influence is great.
The S&P 500 has shown a positive relationship to central bank action on mortgage backed securities since 2009, with every $20 billion shift in bond holdings equaling a 0.37 percent change in stock prices, strategists led by Brian Hayes found. Should the Fed continue to its pace of $15 billion in reductions a month in 2019, the gauge would drop 3.3 percent, the model shows. That’s roughly a third of its annualized return in the past five years.