The Fed balance sheet vs S&P 500 chart is one of the most cited charts in macro. It is also misleading.

The relationship only looks clean in raw levels. Convert to year-over-year growth and it weakens. The sign actually flips on global monetary base growth across the major central banks, where growth correlates negatively with forward equity returns.

The simple level overlay is not evidence of a leading indicator. It is two heavily trending series plotted together. Anything that goes up over time will correlate with anything else that goes up over time.

The same problem shows up when market liquidity indices are treated as leading indicators. Measures like the Bloomberg US Government Securities Liquidity Index are cited to explain selloffs. A correlation that peaks at zero months is coincident by definition. They tell you markets are stressed while markets are stressed.

The fix is to separate measures that lead from measures that confirm. Central bank balance sheets don't directly capture private-sector credit creation, leverage, or risk appetite. Those are what matter and they don't show up cleanly on the Fed's balance sheet.

A framework that tracks the market instead of leading it will get wrong-footed at every turning point.

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