Markets don’t usually turn on headlines.
They turn on liquidity.
Over the past three years, the financial system has been quietly going through one of the largest liquidity withdrawals in history. The U.S. central bank — the Federal Reserve — has been shrinking its balance sheet through a process called quantitative tightening (QT). In plain English: money was being drained out of the system.
That matters.
When liquidity dries up, markets feel it. Credit becomes tighter. Risk assets struggle to gain traction. Even good economic data doesn’t always translate into strong market performance.
That tide is now shifting.
As of December 1st, the Federal Reserve officially stopped shrinking its balance sheet.
This does not mean “stimulus.”
This does not mean “free money.”
And it does not mean inflation is about to run wild again.
But it does mean something important:
One of the biggest headwinds to markets over the last several years has been removed.
Why Liquidity Matters More Than Most Headlines
Markets run less on predictions — and more on conditions.
When liquidity tightens, markets tend to move:
• Slower
• Choppier
• More fragile
When liquidity stabilizes or improves, markets tend to:
• Breathe easier
• Recover faster from pullbacks
• Re-rate higher over time
Ending QT doesn’t flip a switch overnight…
but it changes the direction of the tide.
And that matters for risk assets heading into the end of 2025 and beyond.
What’s Actually Changing Behind the Scenes
Rather than continuing to drain money from the system, the Fed is now allowing its balance sheet to stabilize while reinvesting maturing securities into short-term U.S. Treasury bills.
This may sound technical — but the impact is simple:
It provides relief to funding markets and helps keep cash flowing through the system smoothly.
And when money markets stabilize, capital flows again.
That supports equities.
That supports credit markets.
That improves financial conditions.
Why We’re Constructive Into Year-End — And 2026
We’ve been bullish for months — not because of hype,
but because of alignment:
• Liquidity is no longer tightening
• Economic data remains mixed, but resilient
• Corporate profits continue to surprise
• Volatility has remained controlled
• Markets rallied even under aggressive QT
Now remove the tightening…
That’s not something you ignore.
It doesn’t guarantee gains.
It doesn’t eliminate risk.
But it improves the environment for owning growth assets.
That’s a meaningful shift.
The Bigger Picture
Markets don’t collapse when cash is flowing.
They crack when it’s pulled away.
For three years, cash was pulled away.
Now that pressure is easing.
Historically, those transitions matter — and they tend to show up in asset prices well before they feel “obvious.”
Which is why our positioning is not reactive.
It’s forward-looking.
Final Thought
We’re not bullish because markets “must” go higher.
We’re bullish because:
Conditions are improving.
Liquidity is loosening.
Volatility is controlled.
And probability favors momentum — not fear.
As always, portfolios remain built with discipline and diversification at their core.
But from a macro standpoint,
the air underneath markets is stronger today than it’s been in years.
And that’s not a bad place to be heading into a new year.
JC