Last week, the Federal Reserve chose to maintain the status quo, opting against raising interest rates furtherThis decision provided a lifeline for the S&P 500, allowing it to rally above a critical threshold, thereby increasing the likelihood of sustaining the current bull marketInvestors are now left to ponder the implications of this ongoing period of monetary restraint.
The U.SAsset Bubble May Not Have Peaked Yet
From March of last year until July this year, the Federal Reserve raised interest rates 11 times, pushing the benchmark rate to a range of 5.25% to 5.5%. The pressing question remains: if this cycle of rate hikes comes to an end, could U.S
stocks hit new heights? Historical trends indicate that periods of rate hikes often coincide with bull marketsThe conclusion of such cycles, however, does not necessarily signal an immediate bear market.
For instance, on May 16, 2000, the Federal Reserve raised the benchmark interest rate by 50 basis points to 6.5%. The S&P 500 closed that day at 1466 points and experienced a prolonged period of volatility peaking five months later, ultimately crashing to 768 points by October 2002, marking a significant downturn.
Another notable example occurred on June 29, 2006, when the Federal Reserve implemented its 17th rate hike, reaching a peak of 5.25%. That day, the S&P 500 closed at 1140.8 points, climbing approximately 23.8% before the bull market peaked in October 2007.
On December 22, 2018, the Fed concluded a three-year period of rate hikes, having raised rates nine times to a peak of 2.25%. The very next day, the S&P 500 plummeted by 2.71%, establishing a mid-term bottom, before surging by as much as 44.6% by February 2020.
These snapshots illustrate that navigating the landscape of Fed rate hikes is indeed an art; the 6.5% rate in 2000 was perceived as excessively high leading to a drastic market drop, whereas the 5.25% in 2006 was too low, catalyzing a robust bull market, which later turned into a global financial crisis
- Intel Plans to Spin Off Venture Capital Unit
- Global Markets Surge Overnight
- Will South Korea's Central Bank Continue Its Rate Cut Streak?
- Fixed Income Plus Strategies Attract Investor Attention
- The Decline of U.S. Treasury Bonds Eases
One must now wonder: could the current state of the U.Sstock market closely resemble that of 2006?
Bull Market Driven by Debt
In accordance with trend theory, the bubbles in both the U.Sstock and real estate markets often expand in unison, largely propelled by debtCurrently, there is an increased probability of U.Sstocks reaching historic highs, buoyed by resilient housing pricesThe S&P Case-Shiller National Home Price Index surged to an all-time high of 311.5 points in August, reflecting a year-to-date increase of 5.8% and a staggering 133% rise from its lowest point in February 2012. Moreover, according to data from the National Association of Realtors (NAR), the median price of existing homes in September was $394,300, an increase of 2.8% year-over-year.
Current statistics regarding U.S
government debt are staggeringAs of November 2, the total federal government debt stood at $33.69 trillion—doubling the $16.8 trillion figure from early 2013. The debt-to-GDP ratio has soared to 124.4%, a significant leap from 34.7% in 1980 and 55.7% in 2000, leading to soaring costs of economic growth fueled by debt.
Since mid-2015, the stock markets of China and the United States have dramatically divergedAnalyzing macroeconomic policy, the U.Shas entered an era of increased leverage, while China has primarily focused on deleveraging in real estate and stock marketsData released by the China Banking and Insurance Regulatory Commission at the beginning of the year indicated that from July 2017, when the Fifth National Financial Work Conference was held, approximately 15 trillion yuan of non-performing assets in the banking sector were addressed, surpassing the total from previous years.
To understand the effects of rapid deleveraging on asset prices, consider this data comparison: the financing balances in the Shanghai and Shenzhen stock exchanges plummeted from a peak of 22.66 trillion yuan on June 18, 2015, to 9.041 trillion yuan by September 30 that same year, resulting in a staggering 32.6% drop in the Shanghai Composite Index.
Earnings Momentum Fuels Buyer Participation
As of last Friday, the S&P 500, Nikkei 225, and Shanghai Composite Index have posted year-to-date returns of approximately +12%, +22.4%, and -2.58%, respectively
The U.Sdollar has appreciated by 14.8% against the Japanese yen and around 6% against the Chinese yuan during the same periodAccording to the "dollar smile" theory, the current strength of the dollar appears to be supported by two key factors: intensified geopolitical conflicts that have escalated the demand for safe-haven investments, and a vibrant U.Sstock and housing market propelling stronger-than-expected economic growth.
Last Monday, analysts at JPMorgan noted that over the past 15 years, whenever the U.Sdollar index increased by more than 5%, emerging market stocks had negative returns when measured in U.SdollarsWhy has the Japanese market remained strong? One reason is that the Bank of Japan has committed to keeping interest rates unchanged, prioritizing stability in their stock and housing markets
Additionally, the Bank has been active in purchasing ETFs directly, effectively injecting liquidity into the market.
Furthermore, similar strategies to uplift indexes exist; however, in a bull market, it resembles inflating a balloon, and in a bear market, it acts like blocking a boulder rolling downhillLast year, companies in the S&P 500 set a record high in expenditures, spending $923 billion on stock buybacks, anticipating declines in this booming bull marketSince the start of the year, a 1% consumption tax has been levied on stock buybacks exceeding $1 million in U.Spublicly traded companies and certain foreign companiesData from Bank of America shows that the size of buybacks has decreased by 26% and 3% year-on-year for the second and third quarters, respectively, although there appears to be a recent uptick in activity
The enthusiasm for stock trading has also infiltrated the household level, with nearly 40% of American families now holding stocks—substantially above the long-term average of 27% according to Ned Davis Research.
A recent report by the People's Bank of China's Chongqing branch indicated that in the third quarter, the most popular investment methods among Chongqing residents were "stocks," "funds and trust products," and "bank and insurance financial products," comprising 11.3%, 15.8%, and 40%, respectivelyThese figures represent a decline of 7.5, 8.5, and 4.3 percentage points from the previous quarterOptimistically, this suggests that the A-share market may present untapped potential, awaiting favorable policies to drive growthThe stock strategy team at Goldman Sachs recently commented that the relatively low allocation of stocks by Chinese residents suggests a strong potential for future capital inflows into the Chinese stock market.
(This article represents the author's personal views and does not reflect the position of this publication