Market strategists warn of a possible pullback in June this year, due to a temporary liquidity drain.
Broker-dealer Strategas Research said in a report Wednesday that it expects a $130 billion liquidity drag starting in late May and lasting through June, which could contribute to tighter financial conditions. According to the company, the decline is expected due to a combination of factors, including changes in the Federal Reserve’s balance sheet and increased Treasury issuance.
One of the main causes of this potential pullback is the actions of the Federal Reserve. The Fed is expected to slow the pace of balance sheet contraction from June, a move likely to put upward pressure on the dollar and bond yields, which have historically led to a temporary dip in stock markets.
In addition, Strategas pointed out the potential impact of upcoming measures from the Ministry of Finance. From July there will be a large increase in the issuance of government bonds, financed through money market funds parked in Reverse Repos.
While the shift in liquidity is expected to ease conditions after June, the short-term impact could be negative for equities, the company said.
“Liquidity through the Treasury General Account and Reverse Repos is highly correlated with the U.S. dollar, yields and corporate bonds,” Strategas wrote.
Historical trends also support the likelihood of a pullback, with the S&P 500 showing similar patterns in recent election years. Still, strategists remain optimistic about the overall market trajectory through 2024, driven by expected economic stimulus and infrastructure spending.
“June is a smaller blip compared to April, and once June is over, we expect liquidity to flow during the elections starting in July,” they explain.
“We see more risk in 2025 than in 2024, as the hangover from this easing, the persistence of inflation and the fiscal cliffs materialize.”
