finally investors have a good reason for why the us stock market will suffer aboveaverage volatility and belowaverage performance this month it’s the fed i say “finally” because market analysts for weeks now have been searching for a reason to bet that 2022 will see a repeat of september’s famous seasonal tendency to be bad for the stock market a week ago i described september’s historical weakness as an “unsolved mystery” read what history says about september and the stock market to be sure the mystery still remains for any other year besides 2022 but there’s no mystery about what the us federal reserve will be doing this month in addition to continuing to aggressively raise interest rates the us central bank will be significantly accelerating the pace at which its balance sheet is being reduced at a minimum this doubletightening can be expected to increase market volatility kent engelke chief economic strategist at capitol securities management focused on this consequence in a note this past week to clients “writing the obvious the markets and the economy are entering into era that no one has yet experienced moreover because of the lack of experience mistakes will be made one trader described today’s fed policy as driving 60 mph over ice and pulling the emergency brake” it stands to reason that the fed’s doubletightening will lead to stockmarket losses relatively few advisers are focusing on this outcome at least among the more than 100 i regularly monitor this implies that the doubletightening’s negative impact may not yet be fully discounted in stock prices even fewer advisers are focusing on the centralbank tightening now occurring globally vincent deluard director of global macro at stonex financial wrote this week in a note to clients that “the swiss national bank and the pboc people’s bank of china have started to aggressively shrink their bloated balance sheets even the uberdovish bank of japan has reduced its balance sheet by ¥17 trillion since june and shrinking the ecb’s balance sheet is the next logical step for an institution who has been so far behind on rate hikes” another reason to suspect that the fed’s doubletightening hasn’t yet been fully discounted in stock prices is that in recent years there’s been a close contemporaneous correlation between changes in the fed’s balance sheet and the sp 500 spx  as you can see from the accompanying chart the sp 500 rose markedly in the wake of the soaring fed balance sheet in march 2020 and has struggled in 2022 as the rate of increase of the fed’s balance sheet began to flatten this is worrisome since the fed’s balance sheet hasn’t actually declined by much it simply has stopped growing at its previous rate that’s about to change as deluard notes “quantitative tightening will double to 95 billion a month in september the jump will be all the greater as qt has run behind schedule this summer the fed’s balance sheet dropped by 63 billion since qt started on june 1st about half the promised pace furthermore the recent jump in mortgage rates has reduced prepayments so the fed will likely need to actively sell mortgagebacked securities to meet its 35 billion monthly quota rather than passively letting them roll off its balance sheet” it’s a bad sign that the stock market has already declined so much in the wake of a modest dip in the fed’s balance sheet this suggests that equity markets are more addicted to monetary easing than ever it’s scary to contemplate how much pain will be necessary to cure the markets of its addiction mark hulbert is a regular contributor to marketwatch his hulbert ratings tracks investment newsletters that pay a flat fee to be audited he can be reached at markhulbertratingscom don’t miss learn how to shake up your financial routine at the best new ideas in money festival on sept 21 and sept 22 in new york join carrie schwab president of the charles schwab foundation more era of ‘great volatility’ may be arriving as central banks turn forceful stocks head into worst month of year also read ‘prepare for an epic finale’ jeremy grantham warns ‘tragedy’ looms as ‘superbubble’ may burst