To The Moon

A difficult 2022 seems to be behind us. For our friends in China, a whole year of life was disrupted by the outbreak, and now relaxation measures are gradually improving. However, for financial markets abroad, the pessimism may be just the beginning, the end is still far away.

What are the forces that have driven U.S. stocks in the past?

In the wake of the 2008 financial crisis, the U.S. Federal Reserve embarked on quantitative easing to stimulate economic growth and boost employment. QE was able to accomplish this by, among other things, increasing the money supply and lowering interest rates, making it cheaper for businesses and consumers to borrow money. This in turn led to an increase in spending and investment, which helped stimulate economic growth.

Another contribution of QE to the Nasdaq bull market is through increased demand for stocks. With the Fed buying large amounts of bonds, it drove bond prices up and yields down. This made stocks relatively more attractive to investors because they offered higher returns than bonds. This change in investor preference has led to increased demand for equities, particularly for technology stocks, which make up a large portion of the NASDAQ market. In addition to these factors, QE has also had a positive impact on market sentiment. As the Fed's actions helped to stabilize the economy and promote growth, investors became more confident in the market and more willing to take risks. This increased risk-taking led to higher stock prices and further contributed to the NASDAQ bull market.

In my view, looking at the performance of U.S. equities since 2008, the S&P has risen 6.2 times, the Dow 4.7 times and the NASDAQ 11.8 times from the "zero interest rate" era of the Federal Reserve that began in 2008 to the end of 22 years of ultra-low interest rate hikes in the face of inflation - a big difference. Between 2016 and 2019, when the Federal Reserve gradually raised rates, the S&P rose 79%, the Dow 86%, and the NASDAQ 115%, not a huge difference. The above data suggests that the Nasdaq's volatility was greatly influenced by both the increase and decrease in the Federal Reserve's interest rates, especially during the declining interest rate phase, when its growth lagged far behind the other indices. The reason for this may be that the scale effect of technology stocks is more favored by cheap money than traditional sectors, which have long investment cycles, lower scale effects and slower returns. However, technology companies may be put to the test when cheap money is no longer available and money begins to seek steady returns again. After all, few technology companies have earnings stability, and stock prices will inevitably be revalued over and over again.

Second, will the Fed continue to raise interest rates?

The Nasdaq stock market index, which is made up mostly of technology stocks, has historically done well in a low interest rate environment. This is because low interest rates make it cheaper for companies to borrow money, which allows them to invest more in growth and expansion of their businesses. In addition, low interest rates also make stocks more attractive to investors because they offer a higher rate of return than bonds. However, when interest rates start to rise, the performance of Nasdaq stocks may be hurt. This is because as interest rates rise, it becomes more expensive for companies to borrow money, which may limit their ability to invest in growth and expansion. In addition, higher interest rates make bonds more attractive to investors, which may result in less demand for stocks and lower stock prices.

In addition, when the interest rate hike environment is prolonged, it may be more detrimental to the performance of Nasdaq stocks. A prolonged rate hike environment indicates a change in monetary policy, which is seen as central bank concern about potential inflation. This leads to increased market volatility and investors tend to become more cautious and risk-averse, which leads to reduced demand for stocks, especially high-growth and high-valued stocks like NASDAQ stocks, which could lead to lower stock prices and could ultimately hurt the performance of NASDAQ stocks.

Some NASDAQ companies may also have significant debt, and these companies are more sensitive to changes in interest rates, making it more difficult to repay debt in a rising interest rate environment. The long-term effect of doing so is that these companies will have fewer resources to invest in their businesses and therefore the growth potential of these companies will be limited.

Starting in 2022, Nasdaq is down the most, down 33% for the year. Although I suspected that U.S. stocks would begin to rebound in October, Nasdaq's weakness exceeded my expectations. Both strength and weakness are seen as weakness. It is only because NASDAQ fell more last year that it cannot be seen as falling in place. If this decline is seen as a correction since the 2008 rally, then the current decline is just beginning. The turn of events is in the hands of the Federal Reserve. If the Federal Reserve continues to raise interest rates in 2023, the Nasdaq will have a difficult time. According to my dollar cycle calculations, the Fed's formal rate hike cycle usually lasts 2 years, and if it continues as usual, the Nasdaq will still fall.

Third, a decline in Nasdaq?

Assuming the above logic and timing is valid, how much room is there for Nasdaq to fall? This must be a question of concern. Here, try to measure it from two dimensions.

The first dimension is that the current rate of increase in the Federal Reserve is higher than in 2019. Simply put, the decline in interest rates since the outbreak has been completely wiped out. Nasdaq's current rise is due to the Federal Reserve's money printing frenzy, causing cheap money to pile up in the tech sector, which is the least affected by the epidemic. Therefore, this round of declines could completely erase the declines since the outbreak, meaning NASDAQ could fall to around 6,600 points, i.e., a round trip.

Nasdaq Historical Decline

One of the most dramatic declines in NASDAQ history occurred during the dot-com bubble of the late 1990s and early 2000s. During this period, the NASDAQ soared to unprecedented heights as investors poured into technology stocks, many of which were Internet-based companies. However, the bubble eventually burst and the NASDAQ fell from a peak of over 5,000 in March 2000 to around 1,100 in October 2002, resulting in a decline of over 78%.

The bursting of the dot-com bubble hurt not only technology companies and investors, but also the broader economy. As stock prices fell and technology companies collapsed, many investors lost large sums of money, which led to a reduction in consumer spending and an increase in savings. This, in turn, led to lower economic growth and higher unemployment.

Another major decline in Nasdaq's history occurred during the 2008-2009 financial crisis. During this period, the NASDAQ index fell from a peak of about 2,800 in October 2007 to about 1,300 in March 2009, resulting in a decline of about 53%. The financial crisis was triggered by the collapse of the housing market, which led to a decrease in consumer spending and an increase in foreclosures. This, in turn, led to a decline in economic growth and an increase in unemployment.

The decline in the NASDAQ index, especially during the dot-com bubble and the financial crisis, had a significant impact on the economy. They led to lower economic growth, higher unemployment, and lower consumer spending. In addition, the decline in the NASDAQ index has led to a decline in the overall value of many people's retirement savings and pension plans, which has also affected their personal finances.

Incidentally, the NASDAQ also fell 60% in 1973, and using these historical declines as a reference, I think the current NASDAQ decline will be between 60% and 75%, or between 4050 and 6500, which is a larger range, which is consistent with the NASDAQ's dramatic upward and downward movement back to the pre-quantitative easing of 2020. If we look at this year's closing price, i.e. 2023, Nasdaq will fall by at least 30%+, which is not to be taken lightly.

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