Opinion leader Xia Chun

On May 4, the Federal Reserve decided to raise interest rates by 50 basis points, and the stock market rose sharply on hearing the news. This is a replica of the market rise after the interest rate hike in March. Let’s briefly review the past to better understand the present.

If you remember, before the Federal Reserve started its first interest rate hike on March 16, the US inflation data had reached a 40 year high for several consecutive months. The market was worried that the Federal Reserve would raise interest rates by 50 basis points to curb inflation expectations. The stock market continued to decline, and the S & P index had its worst performance in the same period of the year before the interest rate hike.

However, the Federal Reserve has only raised interest rates by 25 basis points on the grounds of the uncertainty caused by the Russian Ukrainian war. The market was ecstatic and US stocks rose sharply that day. In fact, US stocks ushered in a big rebound in late March, which is closely related to the moderate position of the Federal reserve.

But it didn’t last long. In April, high inflation and the “hawkish” remarks of some Fed officials made the market worry again that the Fed would choose to raise interest rates by 75 basis points. Coupled with the poor financial performance of some leading technology enterprises, the market entered the downward channel again.

In the first four months of this year, S & P fell by more than 13%, not only falling back to the point in May 2021, but also setting the worst performance in the first four months of the year since 1942. NASDAQ fell more than 21% and fell into a bear market.

Against this background, coupled with the fact that the US economic growth rate in the first quarter exceeded expectations by - 1.4%, the capital market has been sensitively aware that the Federal Reserve will make gentle moves again to slow down the pace of raising interest rates and shrinking the table.

Sure enough, the Federal Reserve, which has always taken good care of the capital market, announced a 50 basis point increase in interest rates on May 4 and will not consider raising interest rates by 75 basis points in the next few months. However, the monthly scale of scale reduction from June to August is only $45 billion, and the $90 billion scale reduction feared by the market will not start until September. As soon as the reassurance came out, the market was ecstatic again.

Fed chairman Powell once again mentioned that the US economy is still healthy and has the ability to achieve a “soft landing”, which can also give market confidence.

Although the Fed’s interest rate hike in the past always brought the trouble of “hard landing” in the end, Powell kept reassuring the market. Instead of telling everyone that we can learn a lesson, once the economy really falls into recession, it is possible to stop raising or even reducing interest rates.

A trillion dollar question is, will U.S. stocks usher in another wave of sharp rise and repeat the story at the end of March? We believe that such a possibility exists. Bear market rebound is a very common phenomenon.

However, we should also remind investors that although the U.S. economy, especially consumption and employment, has indeed maintained a strong momentum, the momentum of the U.S. economy towards recession has not changed.

Before the interest rate hike in March, I mentioned that the GDP data of the United States in the first quarter may be zero growth, but the actual growth is - 1.4%, which is worse than expected. Although the statistical method of GDP growth in the United States is different from that in China, after all, according to the American method, once there is negative growth for two consecutive quarters, it will officially enter recession.

Remember, for US stock investors, the terrible thing is not to raise interest rates, but a recession. The Fed’s gentle move also looks forward to the rapid decline of inflation and worries about the early arrival of recession.

Past records show that once the U.S. Treasury bond yield hangs upside down, on average, it will enter a recession in a year. Now, it may happen at the end of this year or the first half of next year.

According to the data since 1978, from the beginning of upside down to the emergence of recession, the median cumulative return of stock markets in various countries is still positive, but the maximum pullback is double-digit. In other words, although the stock market will fall sharply during this period, it is common to rise back to the original level after falling.

However, we should remind you that gold, oil and industrial metals outside the stock market usually cannot rise back to their original levels.

Once the United States enters a recession, it will last for more than a year on average, and the performance of the global stock market during this period is very unsatisfactory.

Since 1978, in the year after the United States entered recession, the maximum median pullback of most assets in a year has been double-digit. For example, the maximum median pullback of S & P and gold is - 24% and that of oil is - 61%.

Similarly, the year after the recession begins, most assets usually fall first and then rise. For example, the median cumulative return of gold in the year after the recession is 1.5% and 1.7% respectively. In the European stock market, although the cumulative median yield of MSCI China, oil, industrial metals and real estate REITs is higher than the maximum pullback median, it is still negative.

But don’t forget that the double-digit maximum pullback is so large that after all, not everyone can bear it. Investors are likely to “cut meat” and sell at the low point, so they will miss the subsequent rise.

The trouble is that the signs of recession are not just in the United States, but also in Europe, Japan and China. In the past, when the United States fell into recession, China’s economy usually performed well and became the engine driving the world economy. This time, China’s economic downturn is actually a prelude to the US entering recession.

In short, US stocks may usher in a rebound in May, but we still need to be prepared for defense. Some assets, such as commodities, may be in a bull market decline, so every decline is a good time to buy, but other assets, such as growth stocks that are still overvalued, may continue to be in a bear market decline, so every rebound is a good time to sell.

(introduced by the author: chief economist of Yinke holdings and President of Financial Research Institute)

Opinion leader Xia Chun

On May 4, the Federal Reserve decided to raise interest rates by 50 basis points, and the stock market rose sharply on hearing the news. This is a replica of the market rise after the interest rate hike in March. Let’s briefly review the past to better understand the present.

If you remember, before the Federal Reserve started its first interest rate hike on March 16, the US inflation data had reached a 40 year high for several consecutive months. The market was worried that the Federal Reserve would raise interest rates by 50 basis points to curb inflation expectations. The stock market continued to decline, and the S & P index had its worst performance in the same period of the year before the interest rate hike.

However, the Federal Reserve has only raised interest rates by 25 basis points on the grounds of the uncertainty caused by the Russian Ukrainian war. The market was ecstatic and US stocks rose sharply that day. In fact, US stocks ushered in a big rebound in late March, which is closely related to the moderate position of the Federal reserve.

But it didn’t last long. In April, high inflation and the “hawkish” remarks of some Fed officials made the market worry again that the Fed would choose to raise interest rates by 75 basis points. Coupled with the poor financial performance of some leading technology enterprises, the market entered the downward channel again.

In the first four months of this year, S & P fell by more than 13%, not only falling back to the point in May 2021, but also setting the worst performance in the first four months of the year since 1942. NASDAQ fell more than 21% and fell into a bear market.

Against this background, coupled with the fact that the US economic growth rate in the first quarter exceeded expectations by - 1.4%, the capital market has been sensitively aware that the Federal Reserve will make gentle moves again to slow down the pace of raising interest rates and shrinking the table.

Sure enough, the Federal Reserve, which has always taken good care of the capital market, announced a 50 basis point increase in interest rates on May 4 and will not consider raising interest rates by 75 basis points in the next few months. However, the monthly scale of scale reduction from June to August is only $45 billion, and the $90 billion scale reduction feared by the market will not start until September. As soon as the reassurance came out, the market was ecstatic again.

Fed chairman Powell once again mentioned that the US economy is still healthy and has the ability to achieve a “soft landing”, which can also give market confidence.

Although the Fed’s interest rate hike in the past always brought the trouble of “hard landing” in the end, Powell kept reassuring the market. Instead of telling everyone that we can learn a lesson, once the economy really falls into recession, it is possible to stop raising or even reducing interest rates.

A trillion dollar question is, will U.S. stocks usher in another wave of sharp rise and repeat the story at the end of March? We believe that such a possibility exists. Bear market rebound is a very common phenomenon.

However, we should also remind investors that although the U.S. economy, especially consumption and employment, has indeed maintained a strong momentum, the momentum of the U.S. economy towards recession has not changed.

Before the interest rate hike in March, I mentioned that the GDP data of the United States in the first quarter may be zero growth, but the actual growth is - 1.4%, which is worse than expected. Although the statistical method of GDP growth in the United States is different from that in China, after all, according to the American method, once there is negative growth for two consecutive quarters, it will officially enter recession.

Remember, for US stock investors, the terrible thing is not to raise interest rates, but a recession. The Fed’s gentle move also looks forward to the rapid decline of inflation and worries about the early arrival of recession.

Past records show that once the U.S. Treasury bond yield hangs upside down, on average, it will enter a recession in a year. Now, it may happen at the end of this year or the first half of next year.

According to the data since 1978, from the beginning of upside down to the emergence of recession, the median cumulative return of stock markets in various countries is still positive, but the maximum pullback is double-digit. In other words, although the stock market will fall sharply during this period, it is common to rise back to the original level after falling.

However, we should remind you that gold, oil and industrial metals outside the stock market usually cannot rise back to their original levels.

Once the United States enters a recession, it will last for more than a year on average, and the performance of the global stock market during this period is very unsatisfactory.

Since 1978, in the year after the United States entered recession, the maximum median pullback of most assets in a year has been double-digit. For example, the maximum median pullback of S & P and gold is - 24% and that of oil is - 61%.

Similarly, the year after the recession begins, most assets usually fall first and then rise. For example, the median cumulative return of gold in the year after the recession is 1.5% and 1.7% respectively. In the European stock market, although the cumulative median yield of MSCI China, oil, industrial metals and real estate REITs is higher than the maximum pullback median, it is still negative.

But don’t forget that the double-digit maximum pullback is so large that after all, not everyone can bear it. Investors are likely to “cut meat” and sell at the low point, so they will miss the subsequent rise.

The trouble is that the signs of recession are not just in the United States, but also in Europe, Japan and China. In the past, when the United States fell into recession, China’s economy usually performed well and became the engine driving the world economy. This time, China’s economic downturn is actually a prelude to the US entering recession.

In short, US stocks may usher in a rebound in May, but we still need to be prepared for defense. Some assets, such as commodities, may be in a bull market decline, so every decline is a good time to buy, but other assets, such as growth stocks that are still overvalued, may continue to be in a bear market decline, so every rebound is a good time to sell.

(introduced by the author: chief economist of Yinke holdings and President of Financial Research Institute)