After the CPI data of October was released in the United States, the the US Dollar Index fell sharply, and the three major stock indexes in the United States rose sharply.
The market generally predicted that the Federal Reserve might start the process of cutting interest rates by the end of next year at the latest. According to historical performance, the Federal Reserve will have a negative impact on the global capital market during the rate hike, especially the US stock market, and will play a certain role in promoting the recovery of the capital market during the Fed's interest rate cut.
In this way, it is easy to understand the strong short-term performance of US stocks, but from the perspective of the past year, the performance of the S&P 500 index is not satisfactory.
Fed rate hike has stopped?
The Fed is concerned about the recent increase in long-term debt interest and the tightening of the financial environment, which undoubtedly helps the Fed's rate hike effect and completes the work of the current rate hike cycle faster.
Powell was apparently extra careful this time, keeping the option of rate hike in December to maintain the effect of hawkish export techniques.
At the same time, Fed Chairman Powell could not send an overly harsh message to the market, and mentioned that inflation expectations are in a good position and should be close to the end of the rate hike cycle.
On the whole, Powell's remarks are relatively neutral, and the hawkish tone in previous interviews has changed. The probability of rate hike in December has decreased, and the expected number of interest rate cuts will increase next year. According to CME group FedWatch Tool, as of November 17th, the probability of not rate hike in December reached 100%.
Figure 2: The probability of not rate hike in December reaches 100%
After the CPI data of the United States was released in October, Nick Timiraos, a well-known journalist who is regarded as the "mouthpiece of the Federal Reserve" and known as the "New Federal Reserve News Agency", bluntly said that the general slowdown in inflation continued until October, and the Federal Reserve may have completed the rate hike. He publicly stated that the Fed wants to achieve a so-called soft landing, that is, to reduce the inflation rate without triggering an economic recession, which seems to be achievable at present.
Nick Timiraos analyzed that investors in the interest rate futures market withdrew their previous bets on the Fed's further rate hike in December this year and January next year, and began to advance the expected time for the Fed to cut interest rates for the first time. The probability of cutting interest rates in May has risen to over 50%.
How does the weakening of repurchase intensity affect US stocks?
In fact, there are two phenomena in US stocks that deserve our attention. One is that the market value of the Big Seven US stocks in the S&P 500 is at the highest level in history, and the other is that the repurchase intensity of constituent stocks in the S&P 500 index is significantly lower than that in previous years. These two factors have negative effects on US stocks.
Data show that Apple, Microsoft, Google, Amazon, Meta, Tesla and Nvidia, the "Big Seven US Stocks", account for the highest market value in the S&P 500. As of November 15, the total market value of the "Big Seven US Stocks" reached 11.69 trillion US dollars, accounting for 29.1% of the total market value of the S&P 500 index of 40.11 trillion US dollars.
Compared with October 31, the "Big Seven US Stocks" accounted for the total market value of the S&P 500 index. 26.3%, higher than 26.2% in November 2021, shows that the market value concentration of US stocks is at the highest level in history.
Because stock repurchase may send signals such as undervalued price and abundant cash to the market, the market usually thinks that stock repurchase is beneficial to stock price performance, and the S&P 500 repurchase index is the 100 stocks with the largest repurchase strength in the S&P 500 index. Data show that during the 20 years from 2000 to 2022, the S&P 500 repo index underperformed the S&P 500 index for only four years, and as of the end of October this year, the S&P 500 repo index had lagged behind the S&P 500 index.
Huachuang Securities found that there is a positive correlation between the repurchase intensity of the S&P 500 index in the first half of the year and the excess return of the S&P 500 compared with the S&P 500 repurchase index in that year, and the correlation coefficient between them is 0.46. The S&P 500 repo index obviously underperformed the S&P 500 index or was related to the obviously low repo intensity in the first half of the year.
In the final analysis, the repurchase intensity of constituent stocks in the S&P 500 index is significantly lower than that in previous years, mainly due to the increase of capital cost in the whole market. In the third quarter of this year, the yield of 10-year US debt once hovered around 5%, and the excessively high interest rate led to the lack of motivation for enterprises to repurchase, while the Fed rate hike was the most fundamental reason for the sharp rise of US debt.
What is the future trend of US stocks?
Under the background of the suspension of the Federal Reserve's rate hike and even the possibility of interest rate cuts in the coming year, the upward resistance of US stocks has weakened, and the US stock market index represented by the S&P 500 index may usher in a good performance.
Compared with futures, options are more leveraged and can take up less funds while hedging risks. Investment can pay attention to the bull market spread strategy of CME group E-mini S&P 500 index options (product code: ES) to hedge risks.
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