The stock market melt-up that has been observed recently has left many wondering what is driving this surge in the absence of the usual strong fiscal flows and seasonal patterns. The latest data from the US sectoral balances sheds some light on this phenomenon.
In March 2024, the private sector recorded a surplus of $380 billion, a positive sign for asset markets as financial balances in the private sector have increased, leading to growth in aggregate demand for goods, services, and investment assets. This surplus was fueled by a $297 billion injection of funds by the federal government, along with bank credit creation adding $148 billion.
Despite these strong fiscal flows, the stock market’s sustained melt-up cannot be solely attributed to them. The table also shows that total outlays by the federal government were down nearly half a trillion from the previous month, with federal taxes and fees allowing $297 billion to remain in the private sector, forming the federal deficit and contributing to the private sector surplus.
One possible explanation for the stock market strength lies in the Treasury interest income from higher interest rates, which has led to a boost in income for wealthy recipients who then invest in paper assets. Additionally, the confluence and rise of the lagged effect of the G5 fiscal flows, the peak in the real estate cycle driving wealth creation, and interest on reserve balances paid to banks by the Federal Reserve Banks are all contributing factors.
These factors, combined with the overall rise in the lagged impact of the G5 fiscal flows, create a financial Venturi Effect, where income sources from already wealthy individuals drive an out-of-scale stock market rally compared to the actual strength of current fiscal flows. This phenomenon is further reinforced by the background effect of the rise in G5 fiscal flows.
As the stock market continues to defy traditional seasonal patterns and fiscal flow expectations, it will be important to monitor these factors closely to understand the underlying drivers of this unprecedented market behavior.
