Last week, the S&P 500 rose for five consecutive trading days and recorded its best weekly gain since November 2022 (+5.9%). The Nasdaq rose 6.5% last week, the best weekly gain of the year. Graphically, it is expected to break the adjustment channel of the past three months. Market participants responded to the combination of mild economic data (employment, inflation, manufacturing) and policy friendliness (FOMC+BOJ dovish and the Treasury's bond issuance was lower than expected). This background inevitably reminds people of goldilocks time. Judging from the position and sentiment data, such a rebound is more like short covering, and the high volatility will continue.
The 10-year Treasury yield had its biggest weekly drop since March:
Small-cap representative Russell 2000 recorded its strongest weekly gain since January 2021:
This has caused bond yields to fall, and last week's corporate earnings were generally positive. The real estate and non-essential consumer goods sectors, which have been suppressed by high interest rates for a long time, rebounded sharply and led the US stock market. The technology and telecommunications sectors also rose sharply, all exceeding 6%; the worst performers were energy, health care and consumer staples.
The decline in market yields led to the biggest drop in the financial conditions index since November last year:
GS's Financial Environment Index
Panic sentiment has obviously subsided, and VIX has fallen sharply:
The US dollar index retreated to its lowest level since September 20
It is worth noting that small-cap stocks rose 7.5% this week, the best weekly gain since February 2021, while "unprofitable technology stocks" rose 15% this week, the best weekly gain since November 2022. Cathie Wood's ARKK had its best week on record, up nearly 19%:
This amazing rise seems to be closely related to the release of emotions, which echoes the cryptocurrency market. Altcoin, a riskier and unprofitable technology concept asset, rose 6.2% last week, compared with BTC+ETH, which only rose 2.1%. The difference in the single-week growth of the two hit the highest level in three months.
Judging from the history since 2017, ALTCOIN has experienced significant beats in the early stages of the past three bull markets, such as August 2017, June 2020, and August 2021. The weekly change difference last week is only the 18th percentile of history, indicating that if this does become a generally rising crypto bull market, ALTCOIN's agitation is far from exaggerated.
Bitcoin has the highest nominal return rate and risk-return ratio among all major asset classes this year:
Historically, we believe that the allocation value of BTC as an alternative asset is largely supported by the shadow of inflation. Taking the 5-year and 10-year breakeven rates commonly used in the secondary market as indicators of inflation expectations, BTC's bull and bear markets always correspond to rises and falls in inflation expectations.
If the Fed policy rate peaks, will it lead to a cooling of inflation expectations (5-year rate has dropped by 20bp in the past two weeks and 10-year rate has dropped by 10bp in the past two weeks)? If Godiloc is not continued, then the demand for alternative allocations may also weaken. Another good situation is that the Fed policy rate peaks, but the actual economic development continues to improve, leading to a sharp rise in inflation expectations. However, at least the current expectations for economic cooling in the fourth quarter and the first quarter of next year are still very strong (excluding the support of inventory replenishment and one-time consumption in the third quarter). Therefore, betting on a decline in interest rates and a rise in alternative assets at the same time is actually somewhat contradictory.
AAPL's Q3 revenue and EPS exceeded expectations, but several indicators fell short of expectations, especially weak sales in Greater China. The stock price fell 3.4% at one point but eventually recovered, rising 4.5% for the week.
This week’s Israeli land incursion did not trigger a rapid escalation (i.e. further involvement of Hezbollah or Iran). Crude oil prices plunged $5, even as the U.S. House of Representatives passed a bill to expand sanctions on Iranian oil.
Dovish FOMC
There was little new in the statement, but what was there suggested a dovish wait-and-see approach to see whether stronger economic activity would hinder progress toward inflation targets. Most importantly, Chairman Powell downplayed the recent rise in inflation expectations, reiterated that while growth was above potential it was not enough to justify another rate hike, and acknowledged that the recent tightening of financial conditions was effectively a substitute for rate hikes. This was also something that the market liked to see. While the Fed's stance has not changed since July, the tightening of U.S. financial conditions is equivalent to a rate hike of about 75 basis points, which will drag on growth, perhaps as early as the fourth quarter, and will not change much due to a pullback in short-term market interest rates.
Judging from the September dot plot, there will be another rate hike this year. Since the Fed never likes to surprise the market, if Powell is confident enough about the recent economic data, he should have made it clear or at least hinted at the next meeting at the press conference. As a result, the Fed still emphasizes data-driven and reiterates that rising long-term interest rates will replace rate hikes. The market has reason to believe that this round of rate hikes has ended, and inflation expectations may not be curbed.
U.S. government financing fell in Q4
The U.S. Treasury lowered its net borrowing target for the fourth quarter to $776 billion vs. the expected $852 billion, and 58% of it was short-term bonds, which immediately eased the market's anxiety about long-term bond yields. The U.S. Treasury issued $1.01 trillion in debt in Q3. The official statement attributed the decline in borrowing demand to increased revenue. In addition, the quarterly refinancing auction this week was $2 billion less than expected, at $102 billion.
The market seems to be overly happy about this news, with both the 30-year and 10-year rates falling by nearly 40bp. Considering that supply pressure is still there, this decline may be an overshoot. Good news from the bond market is unlikely to last too long.
Bank of Japan + new government stimulus
As the market rumored, the Bank of Japan once again relaxed its control over the yield curve, but the method was extremely ambiguous. In short, the Bank of Japan can now allow the 10-year yield of Japanese government bonds to be higher than 1%, but it will not let it go too far. This caused the yen to plummet to 151.7 and Japanese stocks to rise by 7%. It seems that the BOJ is determined to abandon the exchange rate to protect debt. However, some analysts believe that this is just ambiguity in language. In fact, the BOJ's cancellation of the hard limit on the 10yr fluctuation of JGB is equivalent to canceling the YCC. So we see that the yield of Japanese bonds has risen, but the stock market and USDJPY have also risen together. The market's understanding of this matter has actually diverged. But in general, it is definitely inappropriate to bet on a further decline in Japanese yields now. It may be a very good time to go long on the yen.
In addition, the news from the finance department last Friday was ignored by many people. The Japanese cabinet approved a 17 trillion yen (110 billion US dollars) economic stimulus package, which mainly includes tax refunds, energy price subsidies, measures to encourage companies to increase wages and compensation, encourage domestic investment in semiconductors, and promote population growth, etc., up to 3.1% of GDP. If local government spending and state-backed loans are included, the total scale of the plan will be 21.8 trillion yen, up to 4% of GDP.
Japan has the highest debt-to-GDP ratio in the world (262%).
Following the Chinese government, the Japanese central government's leverage will output more cash from the East to the market, and the central bank's balance sheet reduction may be hedged.
Labor costs and employment figures both fell
Productivity grew at an annualized rate of 4.7% in the third quarter, following a 3.6% increase in the previous quarter. Unit labor costs fell 0.8% after rising 3.2% in the second quarter. This is the first decline since the end of 2022. It can be said to be very unexpected, as the market originally expected an increase of 0.7%. In addition, the number of new non-farm payrolls in the United States in October slowed more than expected to 150,000 vs. the expected 180,000, while the unemployment rate rose to 3.9%, the highest level since January 2022. Even without considering the more than 30,000 jobs brought by the UAW strike, this number is relatively poor.
In addition, as expected, the employment figures for August and September were significantly lowered. The data for the first nine months of this year were lower than the initial values for eight months. The data continues to be unreliable, which will make all economists and traders who rely on data feel miserable:
Stock market performance in election years
With exactly one year until the US general election, US politics will enter a more complex year, and stock market returns in election years tend to be below average. Since 1932, the S&P 500 has averaged a 7% return in the 12 months before an election, compared to 9% in non-election years. In recent history, stock market performance before elections has been even weaker, with the S&P 500 averaging a 4% return in the 12 months before the 10 presidential elections from 1984 to date.
While election years typically see earnings growth, stock market valuations typically remain flat:
Stock market volatility is typically above average. Since 1984, realized volatility has averaged 18% in the year before an election, compared with 16% in non-election years.
The economic policy uncertainty index typically rises before elections.
After a presidential election, stocks typically rebound strongly as uncertainty dissipates. The Policy Uncertainty Index typically declines in the weeks following an election as investors gain more clarity on the policy implications of the election outcome. The median since 1984 shows that the S&P 500 has risen 5.0% in the eight weeks from Election Day to the end of the year, compared with 2.6% in the same period in non-election years.
Bank of America Merrill Lynch chief Hartnett believes that next year's panic will be truly eye-catching: "So much anger, so much hatred, but the unemployment rate is so low; can you imagine if the unemployment rate reaches 5%, the society will be in chaos? This is why the policy panic will appear in early 24."
Position
Goldman Sachs Prime Data: Hedge funds actively net bought U.S. stocks after the FOMC meeting, the largest 5-day net buying since December 2021 (99th percentile in the past 5 years). Short cover and buying longs were evident.
SPX Gamma saw its largest one-day increase ever on Thursday, suggesting the market is rushing to add risk to portfolios:
CME’s BTC-based futures contracts hit a new all-time high last week, even though BTC prices are only 53% of their all-time peak:
U.S. stock positions fell slightly last week, despite the market surge (it is suspected that many statistical factors are lagging), the comprehensive stock position 33 percentile dropped to 31, subjective investors 41-38 percentile, systematic investors 31-29 percentile:
CTAs continued to cut their overall equity allocations, reaching the extreme 4th percentile level of history
Equity funds ($-3.4 billion) saw outflows for the fourth week in a row, led by redemptions from emerging market equity funds (data through Wednesday). Bond funds ($2.2 billion) attracted inflows for the fourth week in a row. Inflows accelerated for money market funds ($64.2 billion), particularly in the U.S. ($66.2 billion).
CFTC futures data (as of Tuesday), US stock net long positions fell, S&P 500 and Nasdaq 100 net long positions decreased, Russell 2000 net shorts decreased for the fourth consecutive week. US dollar net short positions decreased. Oil net long positions fell slightly. Gold net long positions increased.
Short positions in bonds are accumulating again (but market yields only started to fall sharply on Wednesday):
CME Bitcoin speculative net shorts decreased slightly. The green line in the figure below shows that except for last week, speculative net shorts have been rising in the previous three weeks, despite the sharp rise in BTC prices:
mood
Goldman Sachs' internal risk appetite indicator jumped, and monetary policy expectations and global growth expectations both rose, similar to the background seen in the early summer:
The Bank of America Bull & Bear Index” indicator fell to 1.4 last week, the lowest level since November 22, sending a contrarian “buy” signal for the third consecutive week. Historically, stocks have risen an average of 6% in the 12 weeks following its trigger.
AAII's sentiment survey and market conditions have rarely diverged significantly, with the bearish ratio rising to the highest level of the year at 43.18-50.28%:
The CNN Fear and Greed Index rebounded above 40, still below neutral:
Outlook for this week
Since we called for a rebound in the U.S. stock market last week based on positions and sentiment data, the market has seen aggressive short covers and speculation on previously oversold properties in line with the shift in fundamentals and policy expectations. Such sentiment is expected to continue for a while, at least it is not expected to reverse this week (no major events). However, judging from the overshoot in the interest rate market and the general trend of economic slowdown, the upper limit of this round of rebound is not high.
Our historical reports:
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