Stocks Are Rallying. This Overlooked Factor Is A Big Reason Why

Stocks Are Rallying. This Overlooked Factor Is A Big Reason Why
Stéphane Renevier, CFA

6 months ago1 min

The recent surge in stock prices, particularly for AI-linked firms, may seem all about tech innovation. But behind the scenes, a good chunk of it can be attributed to the new bank term funding program (BTFP) from the Federal Reserve (the Fed). This lifeline, launched after the failure of two US banks in March, is all about keeping banks from panic-selling high-quality bonds in shaky times.

By offering loans of up to one year, the BTFP doesn't just keep the banking sector afloat but also energizes the whole economy by cutting borrowing costs and avoiding a larger contraction in credit conditions. It's like the Fed is saying "we've got your back," easing investor worries and fueling a risk-on mood, all greasing the wheels for a stock market rally.

No shocker then, the leap in stocks happened just as this fresh wave of liquidity hit the market. And all that money didn't just float around, it chased after the hottest ticket in town: AI stocks.

Sure, BTFP has a striking resemblance to Wall Street's favorite catchphrase, BTFD or "Buy The F****in Dip". And while blending the two might have yielded the same rally, let’s not get carried away here. The growing reliance on emergency facilities implies that banks have been hitting a few snags. Plus, this liquidity rush won’t be infinite and its price-lifting effect will eventually wane. That means the spotlight will shift back to good old fundamentals. With credit getting harder to come by, thanks to climbing interest rates, downside risks are still lurking around this market.



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