Analysis of the Impact of Fiscal and Monetary Policies on Market Liquidity During the Fed's Interest Rate Cut Cycle and Asset Allocation Strategies

Based on in-depth analysis of the market since 2023, the current liquidity environment has undergone a significant shift: the traditional dominant position of monetary policy is being replaced by fiscal policy, and this shift has far-reaching implications for investors’ strategies.

The liquidity cycle since December 2022 has shown an important feature:

• Weakening of Monetary Policy Transmission Mechanism
  : Although the Fed implemented interest rate cuts during 2023-2024, liquidity did not expand as traditionally expected
• Surge in Fiscal Expenditure Scale
  : The U.S. government directly injected liquidity into the market through large-scale fiscal stimulus programs
• More Direct Effect of Fiscal Policy
  : Compared with the multi-layer transmission of monetary policy, fiscal expenditure can affect the liquidity of the real economy more quickly

Studies show that Bitcoin has a high correlation of 0.94 with global liquidity, making it an ideal indicator for observing liquidity changes [1]. Key findings include:

• Bitcoin bull markets highly coincide with periods of rapid global liquidity expansion
• Weakening of the 12-month rolling correlation often precedes major market events
• Even in a favorable liquidity environment, internal market forces may still trigger price adjustments

Based on S&P 500 index data analysis [0]:

• Increase since 2023
  : 77.47%, indicating strong liquidity support
• Average Daily Trading Volume
  : 4.007 billion shares, reflecting market activity
• Current Volatility
  : 11.80%, indicating increased market uncertainty
• Technical Indicators
  : Prices are still above the 20-day and 200-day moving averages, but volatility has increased

In the current trend of liquidity deterioration, the following defensive allocations are recommended:

• Money Market Funds
  : Provide liquidity protection with relatively stable returns
• Short-term Bond Funds
  : Reduce interest rate risk and maintain relative returns
• Cash and Cash Equivalents
  : Deal with potential market volatility

• Utility Stocks
  : Stable cash flow and low beta coefficient
• Consumer Staples
  : Rigid demand and low sensitivity to economic cycles
• Healthcare
  : Strong defensiveness and long-term growth potential

It is recommended to systematically reduce the following high-risk exposures:

• Growth Stocks
  : Sensitive to liquidity changes and have high valuation elasticity
• Small-cap Stocks
  : Volatility increases when liquidity support is insufficient
• Commodity-related Assets
  : High cyclicality and high dependence on liquidity
• High-leverage Assets
  : Risk magnifies in a liquidity tightening environment

• Focus on changes in liquidity indicators
• Maintain a high cash ratio (30-40%)
• Choose high-quality short-term bonds

• Gradually increase defensive stock allocation
• Focus on industries benefiting from fiscal policies
• Maintain a diversified investment portfolio

• Wait for signals of improvement in the liquidity environment
• Reassess investment opportunities in growth stocks
• Consider structural investment opportunities

• Bitcoin Price Trend
  : As a liquidity proxy indicator
• Fiscal Expenditure Rhythm
  : Government debt issuance and usage
• Money Market Interest Rates
  : Changes in short-term funding costs
• Bank Reserve Levels
  : Liquidity status of financial institutions

• Fiscal Policy Shift
  : Changes in expenditure scale and structure
• Monetary Policy Adjustment
  : Changes in the Fed’s policy interest rates
• Regulatory Policy Changes
  : Impact of financial regulation on liquidity

1. Maintain Flexibility
   : Keep asset allocation adjustable in a rapidly changing policy environment
2. Quality First
   : Choose high-quality assets with sound fundamentals and sufficient cash flow
3. Phased Position Building
   : Avoid one-time large investments and adopt a phased strategy
4. Regular Evaluation
   : Adjust allocations in a timely manner based on liquidity changes and policy trends

In the current fiscal policy-dominated liquidity environment, investors need to go beyond the traditional monetary policy framework, pay more attention to fiscal expenditure trends and direct liquidity indicators, and build a more resilient investment portfolio.

[0] Gilin API Data - S&P 500 Index and Market Liquidity Analysis
[1] Forbes - “Bitcoin And Global Liquidity: How Money Supply Shapes BTC’s Price” (https://www.forbes.com/sites/digital-assets/2025/02/28/bitcoin-and-global-liquidity-how-money-supply-shapes-btcs-price/)