In 2024, despite global central banks draining liquidity, stock markets have surged. This raises the question: if liquidity reduction hasn't hindered markets this year, will improved liquidity boost them next year? The global economy is expected to slow, partly due to U.S. trade policy uncertainty, while major economies like China and Europe may adopt looser monetary policies. The Federal Reserve is lowering rates and potentially ending its quantitative tightening (QT) policy, which has reduced its balance sheet by $2 trillion since mid-2022.
Liquidity is hard to track, but generally measured by central bank balance sheets. Citigroup analysts suggest that a $100 billion change in Fed reserves could impact the S&P 500 by about 1%. Despite reserve reductions, the S&P 500 rose nearly 30% this year. Analysts predict the Fed might halt QT by mid-2025 amidst potential market volatility, especially if political factors like a Trump presidency or debt ceiling issues arise.
