Overview

Interest rate cuts are a double-edged sword and should be avoided as part of the price.

Starting from the epic collapse of the U.S. stock market caused by the global COVID-19 pandemic in 2020, this article deeply analyzes the Federal Reserve’s series of interest rate cuts and rescue decisions and their potential impact on the economy, pointing out that it was the unprecedented monetary easing that led to the highest inflation in four decades and was also the cause of this round of interest rate hikes.

Since the end of 2023, the market has been immersed in the joy of the Fed's upcoming interest rate cuts and the wealth effect on the stock market. This article is cautious about interest rate cuts. It analyzes the macro background and market performance of the Fed's interest rate cut cycles over the years. Except for the only "preventive interest rate cut" in 1995, which added fuel to the US stock bull market, the US stock market experienced a sharp correction of more than -20% before and after the other interest rate cuts. After the interest rate cuts in 2000 and 2007, the US economy fell into a deep recession. The United States is currently experiencing the longest period of term interest rate inversion since World War II, which is often the most accurate sign of economic recession.

This article combines the historical law of interest rate cut cycles to predict the possible timing of interest rate cuts in the future, and analyzes the current situation and future trends of the US economy from multiple perspectives, covering key economic indicators such as GDP, employment, and inflation, revealing that the US economy is not as strong as the market expected. At the same time, it quotes the research results of economist Hong Hao on the US cycle theory, analyzes the cyclical fluctuations of the US stock market, and predicts the correction point of the US stock market after the end of this round of rising cycle.

Finally, this article analyzes the 12 major corrections that the U.S. stock market has experienced since the 1970s, and compares the performance of classic safe-haven assets, gold and U.S. Treasuries, during crises. The results show that: it is impossible to hedge in a stagflationary environment; in crises caused by black swan events, both gold and U.S. Treasuries can provide protection, but their trends may not be synchronized; and in longer-term recessions, U.S. Treasuries perform better than gold.

Horror moments in 2020

In the near future, when people look back on history, they will regard 2020 as a watershed between the old and new eras for the world.

The COVID-19 pandemic that swept the world in 2020 has dealt a heavy blow to the capital market. In just 24 trading days from February 19 to March 23, 2020, the U.S. stock market suffered an unprecedented "fuse breaker" market, with the S&P 500 index plummeting by -33.61% and the VIX panic index soaring to 150%, the fourth fastest speed in history. The Federal Reserve launched a "life-saving" interest rate cut. On March 3, 2020, the Federal Reserve announced an emergency interest rate cut of 50 basis points. Other emergency interest rate cuts of 50 basis points in history include: Russia's debt default in October 1998, the collapse of Long-Term Capital Management, the bursting of the Internet bubble in March and April 2000, the "9.11" incident in 2001, the U.S. subprime mortgage crisis that began in August 2007, and the collapse of Lehman Brothers in September 2008. On the evening of March 3, the U.S. 10-year Treasury bond yield fell below 1% for the first time in history, hitting an all-time low.

However, when everyone thought the market had fallen to the bottom, another "atomic bomb" level event suddenly occurred. On March 8, 2020, in order to deter Russia, Saudi Arabia launched an oil price war, and oil prices plummeted by 20% overnight. On Monday, March 9, 2020, an unprecedented circuit breaker market began. This was the first time that the U.S. stock market had triggered the circuit breaker mechanism since the Asian financial crisis in 1997. The S&P index ETF had already plummeted 7.5% before the market opened, and was ready to be suspended due to the first-level circuit breaker.

On Sunday, March 15, 2020, the Federal Reserve unexpectedly lowered interest rates to nearly 0 before its regular meeting. The world's six major central banks joined forces to fight the COVID-19 pandemic with loose monetary policy. At that time, the Federal Reserve decided to directly cut interest rates by 100 basis points, set the reserve requirement at 0%, and launch QE4, using $700 billion to buy Treasury bonds and $500 billion to repurchase them. It felt like the end of the world. The Federal Reserve had already used up most of its bullets, and the market was left with "streaking".

On Monday, March 16, 2020, European stock indices wiped out the gains of the past 10 years, and the U.S. stock market opened ready to face the third circuit breaker in two weeks; on March 18, U.S. Treasury Secretary Mnuchin said: "I will send cash checks to Americans immediately. The numbers are larger than the media speculated." Unexpectedly, the last trick designed by Bernanke that year - helicopter money - actually became a reality.

On Monday, March 23, 2020, the S&P futures hit the limit down within 4 minutes of opening, and the Dow Jones plummeted 900 points. Seeing the situation was not good, the Federal Reserve finally launched an unprecedented, unlimited, and bottomless QE, and began to purchase almost all credit products in the market except stocks: open purchases of Treasury bonds, MBS, and bond ETFs, established TALF (Term Asset-Backed Securities Loan Facility) for ABS, student loans, credit cards, and small business loans, and prepared small business loans. The Federal Reserve has placed all its bets, and the global market is jubilant.

On Tuesday, March 24, 2020, the market initially did not buy it. The pre-market U.S. stock futures circuit breaker hit the limit down, and after the unlimited QE news was released, the circuit breaker hit the limit up, and then restarted the plunge mode. This epic market shock was incomparable even to the global financial crisis in 2008. People believed that the Fed had run out of tricks. But before the evening of March 23, U.S. investment-grade bond funds plunged 20% overnight, accompanied by historic large redemptions. This is a fund that is considered risk-free. After the unlimited QE policy was introduced, the yields of these bonds began to calm down, and credit spreads and swap contract prices also converged. The Fed's policy began to work.

On Tuesday, March 31, 2020, the Federal Reserve launched a repo facility for foreign central banks, so that foreign central banks with a large amount of U.S. Treasuries can use their U.S. Treasuries to exchange for U.S. dollar liquidity without having to sell U.S. Treasuries in the market. The emergence of this repo facility highlights the shortage of U.S. dollar liquidity and the looming selling pressure of U.S. Treasuries, and the strength of the U.S. dollar has therefore eased.

Subsequently, the global market started a two-year bull market under the unlimited easing policy of the Federal Reserve. During this period, growth-oriented small-cap stocks, cryptocurrencies and other assets that benefited most from the monetary easing policy easily gained several times or even dozens of times the returns.

When will interest rates be cut?

Looking back at the Fed's recent five rounds of interest rate hikes, each rate hike will keep interest rates high for a period of time, and the duration ranges from 7 to 17 months. Before the rate cut in October 1998, the interest rate remained unchanged for 17 months; before the rate cut in December 2000, the interest rate remained unchanged for 7 months; before the rate cut in September 2007, the interest rate remained unchanged for 14 months; before the rate cut in August 2019, the interest rate remained unchanged for 8 months; and this time, since the last rate hike by the Fed in July 2023, it has remained high for 12 months. Referring to history, there are still 2 to 5 months before the actual rate cut, that is, in September or December 2024.

After the Fed's recent five rounds of rate hikes, interest rates remained high for up to 17 months

Judging from the balance sheet of the Federal Reserve, there have been two balance sheet reduction cycles in the past decade. The first was from October 2016 to September 2019, and the second was from April 2022 to the present. When the Federal Reserve cuts interest rates, the balance sheet reduction ends. Since 2024, the year-on-year decline in the Federal Reserve's liabilities has slowed down marginally, especially since the June meeting has stopped reducing the scale of bond purchases, and interest rate cuts are "on the verge of happening."

The Fed’s balance sheet reduction cycle is coming to an end

Is a rate cut really a good thing?

Looking back at the terrifying moments of 2020, the market paid an unprecedented painful price in February and March. On April 20, oil prices fell to -40.32 US dollars per barrel, the first time since the birth of mankind that oil prices have been negative. Although the world has ushered in a two-year bull market under the Fed's bottomless rescue policy, it has also buried a huge hidden danger - unprecedented water release will inevitably lead to unprecedented inflation: the US CPI has soared from a low of 0.1% in May 2020 to 9.1% in June 2022. The two-year acceleration of inflation has brought US prices back to the highest level since 1981. The last time this happened was in the 1970s when the world experienced the worst recession since World War II. At that time, the S&P 500 was directly halved, and Buffett's partner Charlie Munger was on the verge of bankruptcy in 1973-1974, which was "the time he was most reluctant to recall in his life."

In fact, there have been few times in history when the Federal Reserve's interest rate cuts were conducive to stock market rises, except for the only "preventive" interest rate cut in 1995 which added fuel to the U.S. stock bull market. At that time, the Internet wave and China's reform and opening up boosted the macro trend of the global economy, which is completely different from the current situation. Looking back at the past five rounds of interest rate cuts, U.S. stocks have experienced deep corrections before and after the actual implementation of the interest rate cuts, with a range of -20% to -60%: three months before the interest rate cut in October 1998, the S&P 500 pulled back -23%; three months before the interest rate cut in December 2000, the chain reaction of the bursting of the Internet bubble began to appear, and the United States subsequently entered a 2.5-year economic recession, during which the S&P 500 fell -50%; one month after the interest rate cut in September 2007, the U.S. subprime mortgage crisis officially broke out and the financial crisis swept the world. In the following year and a half, the S&P 500 fell as much as -58%; ten months before the interest rate cut in August 2019, under the influence of the Sino-US trade war, U.S. stocks experienced a deep correction in the fourth quarter of 2018, with the S&P 500 falling -20%, and six months after the interest rate cut, the 2020 meltdown occurred.

U.S. stocks have experienced significant corrections in the past five rounds when the Fed entered the interest rate cut window period.

Beware of the negative effects of interest rate inversion

Although high interest rates can control inflation, macroeconomic policies are bound to have two sides, and high interest rates are never a good thing for the economy.

The Fed started a cycle of interest rate hikes and balance sheet reduction in March 2022, and the rate hikes were the fastest since 1981. The last time was when Paul Volcker, the legendary chairman of the Federal Reserve, raised the policy rate to a record high of 22% in the late 1970s in order to tame the hyperinflation of up to 15%, laying an unshakable foundation for the US stock market's 40-year bull run. But everything has two sides, and someone must pay for such an aggressive monetary policy. Subsequently, the US economy fell into recession from June 1981 to October 1982.

The principle of high interest rates suppressing the economy is not complicated. Interest rates are the price of money. When the risk-free interest rate is high, people will naturally save their money in banks to earn interest, and businessmen will also reduce loans to slow down production activities. However, banks as monetary intermediaries may suffer losses because the most common way for banks to make profits is to earn interest spreads by absorbing short-term deposits and issuing long-term loans. Under normal circumstances, short-term interest rates must be lower than long-term interest rates, so it is profitable for banks to use the cost of short-term deposit interest to obtain long-term loan interest income. However, when the Federal Reserve raises interest rates and causes short-term interest rates to be higher than long-term interest rates, the above logic will be completely reversed. This is also one of the reasons why a large number of banks have gone bankrupt in previous financial crises.

The term spread is an important indicator to measure the above phenomenon. The 10-year Treasury bond yield represents the long-term interest rate, and the 1-year (or 2-year) Treasury bond yield represents the short-term interest rate. The difference between the two is the term spread. The figure below shows the situation of the 10Y-1Y term spread in the United States since 1950. Whenever the term spread is inverted, a recession will follow, so it is also called "one of the most accurate indicators for predicting economic recessions." The recent inversions have led to: Black Monday in October 1987, the Asian financial crisis in 1998, the bursting of the Internet bubble in 2000, the subprime mortgage crisis in 2008, and the new crown meltdown in 2020. Each inversion is divided into three important time points: the beginning of the inversion, the bottoming out of the inversion, and the end of the inversion. The time window from the bottoming out of the inversion to the stock market crash is about 4 to 15 months, and the time window from the end of the inversion to the stock market crash is 1 to 3 months. Therefore, when the inversion returns to positive, it basically enters the countdown to the collapse of the US stock market.

This inversion began in July 2022 and bottomed out in July 2023. As of July 2024, this inversion has lasted for 24 months, setting a record for the longest period since World War II. It should be noted that whether in the interest rate hike cycle from 1950 to 1980 or in the interest rate cut cycle from 1981 to 2020, the end of each inversion was caused by the rapid decline of short-term interest rates below long-term interest rates, and both fell at the same time. Subsequently, the Federal Reserve started a rate cut cycle, and in most cases the policy interest rate lagged behind the market interest rate.

The duration of the US 10Y-1Y term spread inversion has hit a record high

Is the U.S. economy starting to weaken?

We select representative indicators such as US GDP, employment, inflation, consumption, imports and exports, real estate, PMI, etc. to analyze the current state of the US economy.

GDP

The US GDP and industrial production index show signs of slowing down simultaneously, revealing the overall weakening of economic activity. As a barometer of the economy, the stock market's fluctuations are often closely related to the growth rate of the industrial production index. When the growth rate of the industrial production index drops sharply, even if the economy has not fallen into recession, the stock market often experiences a sharp correction, reflecting investors' concerns about future economic growth. It should be noted that according to data from the New York Federal Reserve, the probability of a recession in the United States in the next 12 months is as high as 66.01%, a record high since 1982.

U.S. GDP and industrial production index slowed down simultaneously

The probability of a U.S. recession in the next 12 months is the highest in nearly 42 years

Employment

The U.S. non-farm job market is showing clear signs of weakening. Data show that the average hourly wage growth rate of all employees in private non-agricultural enterprises continues to decline year-on-year, and the significant increase in the unemployment rate is similar to the recession cycle during the bursting of the Internet bubble in 2000. Non-farm employment data is one of the important indicators to measure economic health. Its weakening may mean that companies are hiring less and the labor market is less tight, which in turn affects the growth of the overall economy.

The U.S. non-farm job market continues to weaken, and the unemployment rate has shown a significant upward trend

Starting from the end of 2023, the year-on-year growth rate of the number of first-time unemployment claims in the United States resumed its upward trend (expressed by the 10-week moving average), while the number of people who continue to receive unemployment benefits has been rising since June 2022. This phenomenon not only reflects the worsening of the unemployment problem, but also makes people worry about the further deterioration of the economy. The increase in the number of unemployment claims not only reflects the deterioration of the economic situation of individuals and families, but also has a negative impact on consumer spending and the overall economy.

Weekly jobless claims in the U.S. rise year-over-year

Inflation

Since inflation peaked in June 2022, the US CPI has continued to cool down for 24 months as of July 2024. This trend is mainly due to the implementation of high interest rate policies, which has caused both CPI and PCE to fall below the 3.5-year short-term cycle line and fall back to the level of the 2000s. Specifically, the monthly year-on-year data of CPI and core CPI both show a clear downward trend. This decline in inflation not only reflects the effectiveness of monetary policy, but also indicates that the economy may face the risk of recession.

U.S. inflation continues to cool, and the overall downward trend has lasted for 24 months

In the fourth quarter of 2023, the Federal Reserve relaxed its attitude towards restrictive monetary policy, which led to a strong wave of "interest rate cut expectations" transactions in the market, with stocks and bonds rising together, and also led to a rush for commodities. It is worth noting that the PPI index has begun to rebound since it bottomed out in July 2023, and the recent year-on-year growth rate has almost shown signs of returning to positive, leading to market concerns about secondary inflation. However, through the comparison of the stock market, PPI, and CPI in the figure below, it is not difficult to find that PPI is a leading indicator of CPI, and US stocks are a leading indicator of PPI, usually leading by about 6 to 8 months. Therefore, it is impossible to use inflation indicators to predict US stocks. The transmission logic is: US stocks rise → commodities rise → inflation rises → interest rate hike expectations → US stocks fall → commodities fall → inflation falls.

The transmission effect of US stock market-PPI-CPI

import and export

The growth rate of US imports and exports bottomed out and rebounded in June 2023, and returned to positive in November of the same year. Its overall trend is similar to that of PPI. However, similar to inflation, the US stock market is also a leading indicator of imports and exports, usually leading by about 3 to 6 months. The year-on-year growth rate of US imports is a representative indicator of US consumption capacity. When US stocks rise, a wealth effect is generated, stimulating American people to consume, and vice versa.

The U.S. stock market leads the import and export growth index by 3 to 6 months

Consumer confidence

The University of Michigan's consumer confidence index rebounded after inflation peaked in June 2022, but has been on a downward trend since March 2024. The consumer confidence index is an important indicator of consumers' expectations of economic conditions and personal finances. Its decline may reflect consumers' concerns and increased uncertainty about future economic prospects. This decline in confidence may affect consumers' consumption behavior and further aggravate downward pressure on the economy.

US consumer confidence index returns to downward trend

real estate

The U.S. real estate market is showing signs of slowing down. Although the growth rate of house prices rebounded after hitting the bottom in June 2023, it showed a downward trend again in June 2024. At the same time, the continued decline in new home starts and sales, as well as the reduction in building permits, indicate that construction activities have slowed down and market demand has weakened. In addition, the decline in the growth rate of total sales and the divergence of inventory growth further confirm the weakness of the market. These comprehensive indicators show that the recovery momentum of the U.S. real estate market is weak and may face more adjustment pressure in the future.

PMI

The Purchasing Managers' Index (PMI) for the U.S. manufacturing sector has been below the boom-bust line for 20 consecutive months, indicating that manufacturing activity has been in contraction since November 2022. The ISM Manufacturing PMI is a key economic indicator used to measure the health of the manufacturing sector. When the PMI is below 50, it means that the manufacturing sector as a whole is contracting, which may be caused by factors such as falling demand, reduced production or supply chain problems.

Specifically, the decline in the new orders index and the new export orders index further confirmed the weakening of manufacturing demand. The decline in the new orders index usually indicates a decrease in future production activities because companies receive fewer orders. Similarly, the decline in new export orders may reflect the decline in global market demand for US-made products, which may be related to the global economic slowdown, changes in trade policies, or exchange rate fluctuations.

The U.S. manufacturing PMI has been below the boom-bust line for 20 months

Cyclic patterns of U.S. stocks

According to the research theory of Hong Hao, a well-known domestic economist, the United States has a 3.5-year Kitchin short cycle and a 7-year Juglar medium cycle, and the stock market often receives important support at the 3.5-year and 7-year moving averages.

Economist Hong Hao proved the existence of a 3.5-year Kitchin short cycle in the United States in his book "Forecast". The short and medium cycles of the US economy are simulated using monthly data of adjusted earnings per share, and US macroeconomic variables such as the S&P index, industrial output, capacity utilization, economic leading indicators, capital expenditure plans, and employment are superimposed on US economic cycle indicators, as shown in the figure below. Although these data have undergone complex statistical and mathematical processing, their important turning points are largely consistent. There are few common deviations from general rules in these cycle sequences, which is evidence of the existence of cycles.

Comparison of Quantified US Economic Short Cycle and Various Macroeconomic Variables

The U.S. manufacturing PMI also shows obvious cyclical characteristics, with each cycle lasting approximately 3 to 4 years. During the major cycle of interest rate cuts, the rising period of PMI is usually longer than the falling period, showing the market characteristics of "bulls are long and bears are short". However, it is worth noting that the specifics of each cycle may vary, and some cycles may not have a significant downturn, while other cycles may experience significant fluctuations. For example, during the global financial crisis in 2008, the decline period of PMI was particularly significant, which reflected the strong impact of the economic environment on the cyclical characteristics of the manufacturing industry. In addition, the emergence of the COVID-19 epidemic in 2020 may have further distorted this cyclical pattern, as the epidemic caused an unprecedented impact on global supply chains and demand.

The U.S. manufacturing PMI has a 3-4 year cyclical cycle

Duration of each cycle of US manufacturing PMI

The above economic cycle law can also be applied to the US stock market. In the absence of a severe economic recession, the stock market usually finds support at the 3.5-year and 7-year moving averages. This cyclicality has been reflected in the performance of the S&P 500 index since 1949, especially during the market meltdown caused by the COVID-19 pandemic in 2020, when the S&P 500 index found support at the 7-year mid-cycle line and began to rebound. The red circle in the figure shows the scenario where the S&P 500 finds support at the 3.5-year moving average, and the blue circle shows the scenario where the S&P 500 finds support at the 7-year moving average.

However, it is important to note that the dot-com bubble burst, 9/11, and WorldConnect Enron fraud in the 2000s, as well as the hyperinflation, dollar crisis, and oil crisis in the 1970s, are all examples of markets failing to follow regular cyclical patterns under special circumstances. These events had a significant impact on the economy and plunged the United States into a deep recession, causing the traditional cyclical support to fail.

The 3.5-year short cycle and 7-year medium cycle effects of the U.S. stock market

Has the U.S. stock market peaked?

The U.S. stock market has shown an obvious seasonal trend in the past two years, that is, a large correction occurs between August and October each year. Since 2022, the S&P 500 Index (SPX.GI) has experienced two corrections of more than 10% during this period. Specifically, from August 17 to October 12, 2022, the index fell by -17%, which lasted for 40 trading days; from August 1 to October 27, 2023, the S&P 500 Index fell by -11%, which lasted for 63 trading days. There are two relatively obvious corrections almost every year. In April 2024, there was a 15-trading-day adjustment of -6% for the first time. History is often symmetrical, and it is expected that there is a high probability of a sharp correction in Q3-Q4 2024.

The largest pullbacks in the U.S. stock market in the past two years occurred from August to October

From a technical point of view, the Nasdaq 100 Index has shown a high 9 peak signal at the daily, weekly and monthly levels. This multi-cycle resonance phenomenon may cause the decline to exceed expectations. If a downward trend starts, there is a dual risk of forming a top divergence at the weekly and monthly levels, which will further deepen the market decline.

Nasdaq 100 shows multi-period peak signal resonance

So if this round of rising cycle is confirmed to be over, to what position will the US stock market fall to be another "golden bottom"? The answer is still in the economic cycle. According to the US 3.5-year short cycle and 7-year medium cycle theory mentioned above, combined with the moving average position of important time points, focus on the following time points: 120 days (half a year), 250 days (1 year), 500 days (2 years), 850 days (3.5 years), 1000 days (4 years), 1750 days (7 years). The following table lists the 5 points that may correspond to this callback (the current S&P 500 point corresponding to 2024-07-24 is 5555.74):

The moving average points of each period corresponding to S&P 500

As can be seen from the figure below, the current 2-year line, 3.5-year short-term cycle line, and 4-year line of the S&P 500 are very close. If the U.S. economy experiences a soft landing, it is expected to receive important support at these three moving averages, that is, a decline of between -20% and -25%. If the U.S. economy deteriorates further, or there is a sudden global black swan event, it may receive support at the 7-year medium-term cycle line, corresponding to a decline of around -35%.

Where will the US stock market adjust to?

What safe-haven assets should I buy?

This section summarizes the performance of classic safe-haven assets such as gold and U.S. Treasuries when U.S. stocks have fallen sharply since the 1970s.

During the 55 years from 1969 to 2024, the U.S. stock market has experienced about 12 major declines. History has traditionally regarded 1981 as a watershed year, when Paul Volcker, chairman of the Federal Reserve, raised the U.S. benchmark interest rate to 22%, eventually taming the hyperinflation of 14%, laying the foundation for a 40-year global bull market.

Before 1974, the Bretton Woods system had not yet collapsed, and the world was still recovering from World War II. The United States had entered a tortuous era of stagflation since 1969. Although gold was nominally pegged to the US dollar, its price had been soaring since 1970, from a low of $35/ounce to $835/ounce in 1980, a 24-fold increase in 10 years. The high and fast increase can even be compared with the current Bitcoin. In the 1970s, the world fell into the most serious period of turmoil since World War II, during which it experienced a series of events such as the escalation of the Vietnam War, the third and fourth Middle East wars, the Watergate incident, and three dollar crises. After the collapse of the Bretton Woods system, the US dollar depreciated severely. Therefore, before 1981, the price of gold had little to do with interest rates, and its biggest impact was the value of the US dollar itself.

After the US benchmark interest rate reached its peak in the century in 1981, a new era began. Gold and interest rates began to show a high correlation. When the Federal Reserve raised interest rates to curb inflation (such as 1981-1982 and 2022-2023), neither gold nor US bonds could serve as a safe-haven effect. This is why "stagflation" is the most difficult macroeconomic environment.

When a black swan event occurs (such as Black Monday in October 1987, the European debt crisis in 2009-2010, the first downgrade of U.S. debt ratings in August 2011, the Sino-U.S. trade war in the fourth quarter of 2018, and the big meltdown in March 2020), both gold and U.S. bonds have excellent protection effects, but the two may not be synchronized in time. Generally speaking, gold will perform well in the early stage, and will pull back in the middle and late stages, while U.S. bonds will react slowly in the early stage and soar in the middle and late stages.

When a longer-term recession comes (such as the bursting of the Internet bubble in 2000-2003, the 9/11 incident, the Enron fraud, and the global financial crisis in 2007-2008), gold and U.S. Treasuries will also provide protection, but gold's risky asset attributes are more prominent, so U.S. Treasuries are better in long-term recessions.

Safe-haven assets: Gold, US Treasury bonds 1

Safe-haven assets: Gold and US Treasury bonds 2

If this rally in the US stock market ends, what assets should be bought for risk hedging? The following figure shows the trend comparison of gold, US bonds, and S&P 500 in this cycle from January 2023 to the present. In the first stage of the market from January to October 2023, the stock market rose slowly, gold fluctuated and leveled, and US bonds fell all the way after the last rate hike by the Federal Reserve in July 2023. As the CPI data that the market is most worried about showed signs of re-emergence in July-September, the three types of assets fell in resonance from August to October 2023. Subsequently, the Federal Reserve relaxed its tone at the FOMC meeting, and the market expected that there would be "at least three rate cuts" at the beginning of 2024. Subsequently, in November 2023, global assets started a crazy "rate cut trade". The yield on the US 10-year bond fell from a high of 5.02% to 3.78% in two and a half months, a drop of 125BP, which seriously overdrew the rate cut that has not yet occurred.

In the 2024 market, the stock market and gold continued the upward trend of interest rate cut transactions, while US bonds experienced a 4-month correction, with the 10Y Treasury yield rising 95BP to return to the level of 4.74%. As of the end of April, gold and US bonds had seriously diverged, and they had gone through two completely different market conditions. After May, a series of US economic data such as the first quarter GDP, non-agricultural employment, and CPI were all lower than expected, showing a trend towards recession. Subsequently, US bonds bottomed out and began to rebound, while gold remained at a high level.

Combined with the above analysis of various macroeconomic data in the United States, the risk of secondary inflation in the United States is relatively low (unlike the imported inflation caused by oil in the 1970s, the United States has become the world's largest producer and reserve country after half a century of layout). The current short cycle in the United States has lasted for 1.5 years. According to the economic cycle theory, the rising cycle is likely to end within the year, and the US economy may begin to fall into recession in Q3-Q4 2024. Since gold has already overdrawn a lot of gains in advance, it is more likely that US bonds will outperform gold in the subsequent interest rate cut cycle.