To The Moon

Driven by the market expectation that the Federal Reserve will turn to cut interest rates next year, US stocks have experienced a new round of continuous gains since November, in which the S&P 500 index has risen by 16.2% compared with the low in October. Historical experience shows that U.S. stocks have performed well in the cycle of interest rate decline and inflation decline. On the other hand, American consumption and real estate have picked up in the case of falling interest rates, and economic resilience has alleviated investors' concerns about the decline in profits of US listed companies in the fourth quarter. Looking ahead, because the inflation in the United States has not yet dropped to the average value of 2% of the Fed's policy target, and the geopolitical crisis has brought about global supply chain problems, the price of superimposed service industry is resilient, and the inflation in the United States may be repeated, and there may be deviation between market expectations and the Fed's policy path. Once inflation rebounds, the possibility of the Fed restarting the rate hike cannot be ruled out. In addition, although the US economy is expected to achieve a soft landing, it does not rule out the possibility of economic recession, and there are hidden worries about the rise of US stocks. Next year's interest rate cut is expected to stimulate US stocks to rise Since November, the market has expected the Fed's monetary policy to change in 2024, which is the main reason for the US stock market to start a new round of upward trend. Treasury Bond's market can reflect this expectation. As of December 18, the yield of 2-year US bonds sensitive to monetary policy dropped to 4.43%, and once dropped to 4.37% on December 14, the lowest since June 2. Judging from the post-meeting statement of the Federal Reserve's interest rate meeting and officials' statements, it is open to cutting interest rates in 2024, but it is not as fast as the market expected. On December 12th, after the FOMC meeting of the Monetary Policy Committee, the Federal Reserve announced that the target range of Federal Funds rate was still 5.25% to 5.50%, which was the rate hike of the Federal Reserve for three consecutive meetings. Compared with the statement of the last meeting in early November, the main change in the statement after this meeting is the evaluation of economy and inflation. It said that recent indicators show that economic activity has slowed down compared with the strong pace in the third quarter. Like previous post-meeting statements since May, this statement still considers inflation "high", but this statement adds a slowdown evaluation, saying that "inflation has slowed down in the past year, but it is still high". Fears of weakening profits due to reduced short-term resilience of the US economy On the consumption side, while interest rates and inflation continue to fall, American residents' consumption expenditure remains resilient. Retail sales in the United States rose 0.3% month-on-month in November, compared with a 0.2% month-on-month decline in October. In the housing market, confidence among U.S. home builders rose in December for the first time in five months as mortgage rates continued to fall. In addition, the annualized number of new housing starts in the United States surged by 14.8% month-on-month to 1.56 million in November, a six-month high. The weakening of earnings of American listed companies in the fourth quarter is a high probability event, but the possibility of a soft landing of American economy increases, which reduces investors' selling pressure on US stocks. At present, the financial report released by the US banking industry shows that the revenues and net profits of BlackRock, JP Morgan Chase, Citigroup and Wells Fargo are all lower than expected. Among them, BlackRock's revenue was US $5.106 billion, which was less than the US $5.16 billion generally expected by the market. There are several hidden concerns in the rise of US stocks First of all, the market expects the Fed's monetary policy to turn too fast, and historical experience shows that the United States still has a long way to go to control inflation. From the historical cycle of the Federal Reserve's interest rate cut, there are many precedents of rate hike again due to the rising inflation after the interest rate cut. For example, 1971-1973, 1976-1977, 1980-1981, 1998-1999, etc. In addition, from the relationship between interest rate cut and economic growth, the interest rate cut cycle basically shows economic slowdown or economic recession. The only special thing is the interest rate cut cycle from July 1995 to November 1998. The annual rate of US GDP accelerated from 1.2% in the second quarter of 1995 to 6.5% in the fourth quarter of 1998. During this period, the unemployment rate also continued to fall, from 5.7% to 4.4%; Inflation has not changed much, maintaining in the range of 3%-4%. This is also the only precautionary interest rate cut by the Federal Reserve, and it is related to the 1996 general election. Given the experience of cutting interest rates too quickly in the 1970s, it is unlikely that the Fed will turn to cut interest rates too quickly in this round of rate hike. Secondly, there is still great uncertainty about the future direction of the US economy, especially the fiscal expenditure may be greatly reduced in the future, and the resilience of the US economy is difficult to sustain. On the one hand, the growth rate of the real per capita disposable income of American residents continues to decline, which will lead to the continuous decline or even negative contribution of American residents' consumption to GDP in the fourth quarter and next year. On the other hand, because the current interest rate in the United States is still at a historically high level and the growth rate of per capita disposable income in the United States is declining, it is unlikely that real estate will continue to pick up in the future. The picture shows the comparison between the growth rate of disposable personal income and consumer spending in the United States To sum up, if the US economy remains resilient and the Federal Reserve's monetary policy turns loose, there is a high probability that US stocks will continue to rise and may reach a new high. However, due to the obvious anti-globalization trend brought about by the current global economic geopolitics and industrial reconstruction in various countries, overseas high inflation may be the norm, and the Fed's monetary policy is repeated. Once inflation counterattacks, the rise of US stocks will come to an abrupt end. Investors can hedge risk by looking at CME group's E-mini S&P 500 index futures and options contracts. Hedging strategy is to sell E-mini S&P 500 index futures and spot basket stocks to build a hedging portfolio, or buy E-mini S&P 500 index put options. At present, the liquidity of CME group E-Mini Standard & Poor's 500 Index options is relatively good. As the end of the year approaches, the liquidity of E-Mini Standard & Poor's 500 Index options blocks continues to deepen around the clock. In the fourth quarter, the average daily trading volume reached a record level of 123,707 contracts in daily block trading. $NQ100 Index Main Connection 2403 (NQmain) $ $Dow Jones Main Link 2403 (YMmain) $ $SP500 Index Main Connection 2403 (ESmain) $ The picture shows the average daily trading volume of CME group-Mini Standard & Poor's 500 Index options $Gold Main Connection 2402 (GCmain) $$WTI Crude Oil Main Line 2402 (CLmain) $