Twelve Charts This Week - 5/10/2024

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The stock market reverts to fundamentals over the long term, but it is driven by liquidity in the near term. Since late 2020, there has been EXCESS LIQUIDITY in the market from two main sources, 1) the stimulus checks sent by Congress to American households during Covid that resulted in excess savings, and 2) starting in mid-2023 a drawdown of the Treasury’s overnight reverse repo facility (RRP) from $2.4 trillion to now about $500 billion. Here are two charts that show the decline in excess savings, and the drainage of the RRP. The question is what happens if the RRP reaches zero. If the economy needs it, the Fed may cut rates or slow down quantitative tightening. The ‘good news’ is that unlike in 2009-15, the Fed has plenty of room to cut rates. (via @ah_shapiro and St Louis Fed)