To The Moon

Wall Street are Experiencing Moments of Despair

A turbulent September, in which the monthly declines of the $S&P 500(.SPX)$ and the $DJIA(.DJI)$ reached 9.3% and 8.8% respectively, the worst September since 2002; The decline of $S&P 500(.SPX)$ in the year reached 25%, ranking the third in history (since 1931).

Compared to the high in Jan 2022, the total market value of S&P 500 has lost about 10 trillion dollars. Facing a round of tragic selling, the bulls of American stocks are falling into a desperate moment: retail investors fled crazily and spent an unprecedented $18 billion to buy put options; Hedge fund equity exposure also fell to an all-time low.

• According to JPMorgan Chase‘s calculation of the public data, retail investors sold 2.9 billion US dollars of shares in the previous week, more than four times the number of shares sold at the market low in mid June, and the second largest weekly selling volume in the past five years.
• In addition, according to Sundial Capital Research‘s Options Clearing Corp data, retail investors fled crazily and spent an unprecedented $18 billion to buy put options;
• At the same time, the hedge funds tracked by Morgan Stanley have reduced their stock exposure to the lowest level in history, increasing short positions for ETFs for the 11th consecutive trading day. The cash level of fund managers is also close to the historical high, and the market wait-and-see sentiment is increasingly strong.

The Federal Reserve Warns of Risks

The FED also became nervous. On September 30 local time, Vice Chairman of the Federal Reserve Bradard warned that the FED is paying close attention to the impact of its policy actions on the global economy and financial system. 

At present, the important question that investors in the US stock market have to think about is when the Fed's tightening cycle will end.

In addition, the Bank of America warned that the current US credit pressure indicator is close to the critical point. If the Federal Reserve does not find a balance point from controlling inflation and unexpected risks, the US may have a financial market crisis like the UK.

Known as the most determined bull on Wall Street, Marko Kolanovic, a strategic analyst at JPMorgan Chase, pessimistically stressed that the risk of the FED's policy mistakes and geopolitical escalation is increasing, which makes the target position of US stocks face downward risk in 2022.

And the pain of the US bear market may not be over.

According to the statistics of bear markets in the history of the United States, the average decline of American stocks reached 39% within 20 months, which means that there is still 19% potential decline space for American stocks; The current bear market lasts for 9 months, less than 50% of the average duration of the past 14 bear markets.

The high-yield bond strategy team of Bank of America believes that if the credit stress indicator (CSI) reaches more than 75% of the "critical area", the situation will become out of control. Now it is time to pay attention to risk management. This means that at the next interest rate meeting, the Federal Reserve should slow down the pace of interest rate increase, and then should pause, so that the economy can fully adapt to all the extreme tightening policies that have been implemented.

The Next "Black Swan" in Europe

It is noteworthy that Britain, the "storm eye" of European financial markets, is about to face the next "black swan". On October 21, S&P and Moody's, among the world's three major rating agencies, will reassess the credit rating of the British government. Once the credit rating is downgraded, it will put great pressure on Britain's foreign debt.

The market is very worried about the credit rating this time, because S&P has taken the lead in sending out the "alarm signal". On September 30 local time, S&P maintained the UK's AA/A-1+sovereign rating, but downgraded the rating outlook from "stable" to "negative".

S&P 500 said that after the UK announced the tax reduction policy, the UK's fiscal deficit will increase and the risk of fiscal imbalance will increase.

S&P estimates that if the new tax reduction policy continues to be implemented, the proportion of the British government budget deficit to GDP will increase by 2.6% by 2025, which will make it difficult for the authorities to achieve the ambition of reducing the proportion of public debt to national income.

S&P believes that the British economy will shrink in the next few quarters, and GDP will decline by 0.5% next year.

Meanwhile, Moody's has labeled the largest tax reduction plan launched by the British government in 50 years as "negative". Moody's believes that this move will threaten the reputation of the UK in the eyes of investors, but Moody's has not yet downgraded the UK rating outlook to negative.