With the convening of the Federal Reserve's interest rate meeting, investors' concerns have been greatly alleviated. Compared to before, although Federal Reserve Chairman Powell has continued to open the door to further tightening policies, his stance has softened, prompting investors to bet that interest rates have reached their peak. At the same time, the traditional seasonal characteristics of US stocks at the end of the year are also a source of confidence for bulls. At a time when the suspense about the policy endpoint is expected to come to an end, the prospect of a soft landing may become an important variable determining the year-end market of US stocks.
Multiple factors trigger rebound
Dow Jones market data shows that the three major stock indices recorded their strongest weekly gains since 2023 last week. At the same time, US bond yields fell sharply, and benchmark 10-year treasury bond bonds fell more than 33 basis points after hitting a new high two weeks ago. The continuous turbulence in the US bond market is widely regarded by Wall Street as the main reason for the accelerated stock market correction since October.
Boris Schlossberg, macro strategist at BK Asset Management, stated in an interview with First Financial that the two biggest factors that plague the market are expected to be resolved. Firstly, there are concerns about interest rate hikes. After the release of the October non farm report, signs of a slowdown in the US economy have been preliminarily confirmed. From Powell's cautious stance, it is likely that the tightening cycle has reached its end. Secondly, there are US bonds, and the rise in long-term interest rates will limit the valuation and attractiveness of stocks.
Schlossberg believes that emotional freezing points are also one of the catalysts for rebound. The Fear&Greed Index has redirected to& Quot; Extreme panic; Quot; Interval. In the past two weeks of selling off in US stocks, an increasing number of individual stocks have hit a new 52 week low, and the proportion of individual stocks on the 200 day line of the three major exchanges falling was close to 80%, which is often a situation that only occurs in bear markets.
Institutional bulls have also faced challenges, with data from the CFTC (Commodity Futures Commission of the United States) showing that hedge funds and mutual funds have stock positions below the long-term average. According to the National Association of Active Investment Managers; Quot; Anchor of Global Asset Pricing; Quot; Continuing to hover at high levels since the financial crisis, fund managers have adjusted their risk exposure back to the level of October 2022.
Michael Hartnett, Chief Investment Strategist at Bank of America, wrote that the bull bear indicator entered& Quot; Extreme bearish& Quot; After the region, the reverse buying signal for risky assets has been triggered. From historical experience, the median upward space for US stocks in the next three months is 5.4%.
Barclays Bank believes that the reduction in US stock allocation exposure, bullish technical signals, and seasonal factors have significantly boosted the possibility of a year-end rebound in US stocks.
Deutsche Bank strategist Jim Reid is actively optimistic about the upcoming market, stating that the seasonal rise in US stocks has begun. November and December are one of the best performing months for US stocks, and year-end often stimulates buyers to buy stocks, especially fund managers who are eager to turn around their performance& Amp; Quot; You must respect seasonal factors& Amp; Quot; He said.
Bounce or reversal?
Jean Boivin, head of research at BlackRock, the world's largest asset management firm, believes that any rebound in the US stock market at the end of the year may be short-lived as the stock market does not fully reflect the prospect of interest rates continuing to rise for a longer period of time& Amp; Quot; The question we need to ask is whether the surge in interest rates has been transmitted to the stock market, and our answer is not yet& Amp; Quot; He added,& Quot; We believe that the stock market will continue to decline in the future, but once the adjustment is completed, the environment in 2024 will be better& Amp; Quot;
According to Powell, achieving the 2% inflation target may require a period of below-trend economic growth and further weakness in the labor market, and he still hopes to see a soft landing.
If the anti inflation process begins to slow down, it may mean that interest rates will remain high for a longer period of time, exacerbating the risk of runaway situations such as recession and a surge in unemployment. Deutsche Bank has released a report stating that recent high-frequency data shows signs of potential inflation stabilizing in the range of 3% -3.25%, which has increased the pressure on the Federal Reserve to excessively tighten policy, especially as financial conditions begin to ease.
City Index market analyst Fawad Razaqzada believes that many macro concerns that hinder further stock market gains remain widespread& Amp; Quot; I wouldn't be surprised if the market were to fluctuate again. It may be too early for investors to become optimistic. The Federal Reserve's interest rate cut may have several quarters left. The monetary policy of important economic zones such as the eurozone and the UK will also remain tight for a long time& Amp; Quot;
Considering the trend during the recession, the importance of achieving a soft landing for investors is self-evident. However, historically, there have been few successful cases of the Federal Reserve after experiencing a cycle of aggressive interest rate hikes.