To The Moon

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Summary of this post:

First, the surge in U.S. stocks in 2023 was due to risk appetite, and will also fall due to the dispersal of risk appetite. Fitch announced the downgrade starts the prelude to "fall";

Second, the current risk premium capability of the US. stock market is already very low (reflected by the high price-earnings ratio of the market), even if there is no Fitch downgrade event, it will be difficult for US stocks to continue to grow.

This downgrade the credit of U.S. treasury bonds on the surface, is actually increases the risk level of all U.S. assets.

Some other negative macro factors:

Liquidity Perspective:

• The US money supply falling at the fastest rate since the 1930s, which is largely a consequence of the reversal of the liquidity generated by massive post-pandemic fiscal and monetary stimulus, the Federal Reserve shrinking its balance sheet via quantitative tightening, falling bank deposits, and weak demand for and provision of credit. And the decline of M2 in the United States means that market liquidity is still tightening further, which will be transmitted to the economy and the stock market.

  

• The Biden administration originally exempted students from student loans, but in the game with the Republican Party on the debt ceiling, it promised to resume student loan repayments from September 1. There are currently 43 million people who owe a total of $1.78 trillion in student loans. These people are both the main force of consumption and the main force of stock speculation. It means that starting in September, both consumption and the stock market will be affected.

Credit Crisis

• Fitch's lowering of the national credit of the United States will have a certain chain reaction with the credit of the two companies. This is because many large investment institutions have clear agreements with investors when raising funds. For example, investing in bonds must be 3A Now that Fitch has lowered the rating, it will inevitably lead to some selling.

• Moody's newly lowered the ratings of ten bank stocks, and also issued a warning to the well-known Bank of New York Mellon. Moody's believes that the banking industry is facing multiple pressures. In addition to high interest rates, there are more and more commercial real estate storms in the United States, and the bad debt rate is increasing. This puts increasing pressure on regional banks and increases risks and uncertainties.

Inflation & Recession

• Rising oil prices will further squeeze consumption space. To put it another way, the United States’ consumption of imported goods has decreased significantly in the past six months. This is due to the increase in service industry expenditures under the great inflation, which has squeezed commodity consumption. Therefore, it has constituted a negative impact on Asian manufacturing countries such as China, Vietnam, and India. Bad news. In the first half of the year, oil prices fell, leaving room for US consumption, and the situation reversed in the second half of the year.

• The U.S. labor market has reached an inflection point. According to data from Ziprecruiter, the current number of vacancies in the U.S. and the enthusiasm of employers for hiring have fallen off a cliff from the peak of the previous two years. It means that soon, US policy will need to shift from reducing inflation to dealing with recession.

According to the previous experience and theoretical analysis or in view of the following situations:

1) U.S. Treasury bond yields need to be cut sharply, or Federal Reserve interest rates need to be cut, but market estimates are not realistic in the short term (3-6 months);

2) The risk appetite of funds has changed again, and funds are flowing from the stock market back to the bond market for safety reasons.

In the short term, US stocks are not yet ready for a bear market.

Under the reality that the Fed is unlikely to enter a cycle of interest rate cuts in the short term, the self-regulation of the market means that the stock market has reached its peak, and there is a high probability that it will enter an adjustment period. So does this mean that US stocks will enter a bear market immediately? In the short term, US stocks are not yet ready for a bear market.

The level of market risk appetite will be adjusted downward, but so far we believe that the adjustment range is still acceptable: the macroeconomic fundamentals remain at a high level (the unemployment rate and economic growth expectations are still relatively optimistic), and risk appetite will not fall too much .

What will happen in the market outlook?

First, stocks acquired by liquidity and high risk premium capabilities will enter a downward cycle, such as AI concepts, ChatGPT concepts, stocks with high growth expectations will bear the brunt, and value stocks will be relatively stable;

Second, the stock market basically reflects the expectations of the macro economy. Whether it is to cut interest rates in March or April next year, the subtext is that inflation will end, and the macro economy needs the Fed to cut interest rates. As far as the current situation is concerned, the stock market rose sharply before the interest rate cut very low probability.

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