To The Moon

At the end of 2023, US stocks rose again to get rid of the gravity of the earth, which surprised everyone.

In fact, throughout 2023, the U. S. stock market has been beating the face predicted by Wall Street investment banks at the beginning of the year, from the first half to the second half of the year to the end of the year.

The direct driving force behind the rally at the end of the year was brought by Federal Reserve Chairman Jerome Powell.

After the last Federal Open Market Committee (FOMC) meeting of the year on December 13, the Fed announced a third interest rate hold and signaled that tightening monetary policy was over, with three rate cuts likely in 2024.

All three major U.S. stock indexes, $S&P 500(.SPX)$ $NASDAQ(.IXIC)$ $DJIA(.DJI)$ hit 52-week highs after the Fed announcement.

It seems very reasonable that the expectation of a cut in interest rates in 2024 will lead to a rise in the market, but the problem is that in the entire tightening of 2023, the rising power of the market, in addition to artificial intelligence, is the expectation of the end of the tightening cycle, it can be said that all the "price in", by Powell directly, it seems that there should not be such a big reaction.

Although there are many factors that affect the trend of stocks, the most fundamental driving force of the rise is still determined by the amount of money entering the market. The most puzzling thing is that the United States has maintained ultra-high interest rates in 2023, and the Federal Reserve is still withdrawing liquidity, so where does the money entering the U.S. stock market come from?

Where does this incredible liquidity come from?

Wall Street analysts have been searching for answers.

Matt King, a former Citigroup strategist, said that while the Fed has been reducing the size of its balance sheet, some central banks have acted to increase market support by allowing bank reserves to expand, thereby increasing the amount of money available for markets and the economy.

The Fed has reduced its bond holdings to $7.8 trillion from a peak of $9 trillion last year, but King argues what matters is how reserves in the US banking system have increased by $500 billion since January, compared with the decline in the Fed's balance sheet.

According to King, the Fed is not alone. Instead of withdrawing $1,000bn of liquidity after declaring war on inflation in 2022, the world's big central banks injected about the same amount of money.

This wave of liquidity injections began in October 2022, when the S&P 500 bottomed, and was first driven by the Bank of Japan and the European Central Bank. After the collapse of Silicon Valley banks this spring, the Federal Reserve joined the chorus, acting to support its own banking system.

The increase in bank reserves has been driven by a number of factors, including continued outflows of funds from the Fed's reverse repo program. The outflow of funds from the Fed's reverse repo program has now become the main driver, with counterparties have withdrawn more than $1 trillion from the program since April, according to Fed data.

Senior strategists at other investment banks, including Morgan Stanley and Goldman Sachs Group Inc., have also recently begun discussing the market implications of reverse repo outflows and outflows from the U.S. Treasury's general account.

"December 1-10 continued the recent trend of US liquidity expansion, driven by outflows from reverse repo facilities and Treasury general accounts," Goldman's cross-asset analysts team said in a recent report.

The Goldman Sachs team added: "Combined with the lagged effect of the US easing pulse following the funding stress at regional banks earlier this year, high liquidity should support risk asset performance and credit spreads tightening by year-end."

In the first pigeon week of December alone, banks' reserves increased by about $50 billion, according to Goldman Sachs.

It is more difficult to predict in 2024

US stock bears have become extremely cautious, after the annihilation of Wall Street investment bank forecasts in 2023 and being repeatedly slapped in the face at several nodes throughout the year. Of course, what is even worse are the short sellers, who probably lost all their underwears.

Short sellers are really dead, what will happen to the 2024 market?

Overall, most institutions remain optimistic for similar reasons, the most difficult period is over. The Fed will cut interest rates several times in 2024, there will be relatively plenty of funds, and the global economy will successfully achieve a soft landing.

At the latest, the market's breadth is also expanding, with more than 60% of the S&P 500 hitting new 20-day highs last week, which Ryan Detrick, chief market strategist at Carson Group, believes it is a sign that record highs are just around the corner.

According to Ryan Detrick, there have been 15 such rare signals since 1972, with each time the S & P 500 rose in the following year, with an average return of 18%.

Despite all the positive support, these forecasts are hard to trust. After all, this wave of market rally in 2023 is some "unknown", and lacks effective support, but it has reached such a high level. The current answer from Wall Street is that the market is driven by "similar quantitative easing", so what will happen in 2024?

In addition, the big market rally in 2023 has a major feature, which is also a point that is constantly tainted, that is, the rise is almost driven by a few big technologies, and the market breadth is very poor.

In fact, this feature accelerated the market rally even further, and the huge market capitalization of a few companies, coupled with a large number of passive investment products tracking the index, amplified the trend. It was the interpretation of this wave of unpredictable and magnificent market.

These major problems are not good for 2024, and predicting the future depends on whether the major elements that support the current rise are still in place.

If the current liquidity pulse disappears, the stock market could be in trouble, according to Matt King.

Regardless of what happens early next year, the Goldman strategists expect this trend should continue to support stocks through January, until the Treasury releases the next update on its bond and Treasury issuance program, which could impact the reverse repo facility.

Of course, the monetary environment will be relatively loose in 2024 with the Federal Reserve's interest rate cut, but don't forget that as an investment and financing market, the US stock market is really quite good in giving back to investors, but at the same time,the US stock market has not recovered as a financing market.

From the perspective of the function of the stock market, the financing function is also a very important part, and the company buyback is also a very important force in the current rise of big technology, so it seems that the vitality of the US stock market is declining.

In addition to the financial side, another major driving force for the 2023 market rally is the emergence of ChatGPT, and the commercial application imagination of artificial intelligence is opened. In 2024, it still depends on whether the performance expectations brought by this technology can be implemented. Once the growth is not fast enough, it will bring pressure on the current high stock price.

Overall, the financing function of the US stock market is expected to rebound further in 2024, but the investment market may not be as extremely optimistic as it is at present.