By now, most interested investors should be aware of what the Fed has been doing and its impact on assets.

Recently, I came across two interesting articles/threads which argue that it isn’t really the total size of the Fed’s balance sheet that matters, but rather a subset of it which can be termed as “net liquidity”. (1) (2)

This seems like an interesting enough idea to validate empirically. So, here’s a simple dashboard together using Fed data to see how “net liquidity” tracks against the S&P 500.

Certainly, looking at since COVID escalated globally and Fed did QE in response, net liquidity seems to track quite against the S&P 500, at least visually. In the table below, I have also added lagged and twice lagged % change in net liquidity as one of the sources suggest that net liquidity is correlated with S&P 500 2 weeks later (mostly 2 data points later). It’s not obvious to me that the lagged measure tracks better, though I didn’t look into it, beyond just eyeballing the recent entries. There are also some gaps in data, I think partly because I applied strict date-matching when joining the pieces of data together, which affected some data points (not 100% sure as I put this together quickly).

I’ve started learning Python but not proficient enough yet to put a dashboard together so this was done in R Shiny.