What makes the market fall? Which Asset to follow?
$S&P 500(.SPX)$ decreased 3.1% last week, $NASDAQ 100(NDX)$ plummeted 5.5%, causing market attention. T
Maybe it’s not a bad thing to fall at this position. It can not only digest its overly strong expectations, but also help to restart the interest rate cut trade.
Liquidity Issues
The turning point of financial liquidity in the second quarter will put pressure on U.S. stocks.
The difference between the Federal Reserve's balance sheet rule - TGA account - reverse repos is used to measure liquidity within the financial system, which is approximately equal to the scale of reserves in the commercial banking system.
Recent changes are that the Fed's monthly balance sheet reduction is still ongoing, but the tax season in mid-April will withdraw a large amount of funds, and the reverse repurchase that has been the main contributor to funds since the end of last year is also nearing exhaustion.
Interest Rate Cut Postponed
The postponement of interest rate cut expectations has caused a surge in U.S. bond yields and the U.S. dollar, which puts pressure on U.S. stocks, especially growth stocks. $NVIDIA Corp(NVDA)$
The source of this round of interest rate cuts postponement is the direct result of the decline in interest rates and the easing of financial conditions in the fourth quarter of last year, which led to increased demand. To achieve the goal of suppressing inflation, demand must be suppressed, and suppressing demand requires financial conditions to tighten again.
How Long Will the Bear Market Continue?
According to the weight of the financial conditions index composition static calculation, if the financial conditions index returns to the high point of 100.7 in October last year from the current 99.6, the U.S. stock market may pullback 8-10% to around 4700. At that time, the US credit spread will widen by about 50bp.
The Federal Reserve is expected to start slowing down the balance sheet reduction in June to help hedge the current turning point of liquidity.
The current tightening of financial conditions will be reflected in the actual growth pressure and unexpected inflation and growth indices over the next 1-3 months.
In fact, with the recent increase in the 30-year U.S. mortgage rate, existing home sales, an important support for recent U.S. demand and high inflation, have begun to fall. The "turnaround" of all kinds of asset pullbacks, as well as the further suppression of demand and prices, may restart the interest rate cut trade.
At present, the short-term asset allocation is still
Short-term government bonds are the best $iShares Short Treasury Bond ETF(SHV)$ $iShares 0-3 Month Treasury Bond ETF(SGOV)$
Long-term government bonds are secondary $iShares 20+ Year Treasury Bond ETF(TLT)$ $ProShares UltraPro QQQ(TQQQ)$
U.S. stocks and credit bonds to avoid, and commodities are also overpriced. $SPDR Gold Shares(GLD)$ $United States Oil Fund LP(USO)$
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