作者：jinze

Last night, the market experienced a significant pullback, mainly due to investor concerns about the Federal Reserve potentially shifting to a more 'hawkish' policy path. This sentiment triggered widespread selling, particularly evident in growth and tech stocks. Despite the severe market reaction, I believe a deeper analysis of the current macro environment and policy dynamics is necessary to avoid being misled by short-term fluctuations.

Policy Interpretation: The Facade of Hawkishness and Its Inner Logic
The policy signals released by the Federal Reserve mainly focus on 'slowing the pace of interest rate cuts' and 'becoming more data-dependent.' Powell clearly stated that the Federal Reserve will remain highly sensitive to future economic data, and the interest rate cut path for 2025 may include three cuts, but does not rule out the possibility of pausing or adjusting the pace. The dot plot indicating three rate cuts appears slightly conservative compared to previous market expectations, leading the market to believe that the Federal Reserve is attempting to convey a hawkish signal, and actual cuts may be fewer than three.

However, from the perspective of the broader context, this 'hawkishness' is more of a facade:

The economic fundamentals remain resilient, with U.S. GDP growth reaching 3.1% (Atlanta Fed GDP forecast data), and the economic surprise index maintaining a moderately positive level, indicating that economic activity remains robust.

The labor market shows signs of weakness, with the unemployment rate rising 0.7% since June 2023, and the tightness of the labor market has eased somewhat (refer to the labor tightness index in the Federal Reserve report).

Core inflation trends have stabilized, with core PCE inflation remaining around 3%. Although it has not quickly declined, there is no significant upward pressure.

More reasons for last night's market crash
The market decline was not only due to the interpretation of Federal Reserve policies but also related to the following factors:

The impact of rising secondary market interest rates, with the financial conditions index (FCI) slightly rising last week, U.S. Treasury yields returning to six-month highs, and mortgage rates increasing by 1.5% since September, suppressing real estate demand, among other factors. However, the previous election of Trump was largely ignored by the risk asset market.

Market technical factors: Although the S&P 500 index is close to historical highs, only 45% of its component stocks are above their 50-day moving averages, indicating insufficient internal market breadth. This 'narrow market' phenomenon has exacerbated individual stock volatility.

Changes in capital flows: Last night, trading volume surged significantly (1.6 billion shares traded far exceeding the annual average of 1.2 billion shares), reflecting the risk-averse behavior of institutional investors and the urgency for year-end fund reallocation (funds typically need to reduce holdings in those that have risen significantly).

Is the market panic reasonable?
I believe that last night's market panic exhibited a certain degree of overreaction. Although there are fewer positive news items towards the end of the year, it is reasonable for assets that have risen too much prior to unexpected negative variables to decline. In fact, even if the Federal Reserve is 'hawkish,' it is more likely to signal a 'gradual rate cut' through the dot plot, and we are far from tightening monetary policy. Currently, the U.S. economy shows some resilience, but it is not in free fall. This economic performance is sufficient to support the market's fundamentals.

At the same time, the market sell-off reflects more uncertainty about the future and misinterpretation of policies rather than a deterioration of the fundamentals. For example, although financial conditions have tightened somewhat in the past week, they remain in a loose range. The market's excessive focus on short-term dot plot changes ignores the importance of long-term economic trends, which is something to be wary of.

Divergence in bullish and bearish views in the market
Market participants have notably diverged in their interpretations of interest rate policy expectations, but both sides have their own ample reasons:

Dovish View
Rising credit card delinquency rates indicate increasing financial pressure on consumers.
The issue of maturing debts in commercial real estate (CRE) may trigger liquidity risks.
Declining commodity prices and deflation risks in the Chinese economy exert downward pressure on the global economy.

Hawkish View
Actual economic growth remains strong, with no significant signs of recession in the short term.
Core inflation stabilizing at 3% and high fiscal deficits exacerbating long-term inflation pressures.
If financial conditions gradually loosen, inflation may reignite.

Risks and Opportunities Coexist
I believe the current market decline offers investors an opportunity for reflection. From a risk perspective, it may indeed bring several challenges, such as the possibility of inflation rebounding, the hidden dangers of high fiscal deficits, potential turmoil from significant layoffs at DOGE, and the selling of facts after Trump's official inauguration in January, etc. Of course, it is essential to note the issue of long-term versus short-term effects. The first two are long-term issues, requiring several months of data to corroborate, while the latter two are short-term impacts that may not even materialize.
From the perspective of opportunities, the market crash also means opportunities for certain risk assets.

For example:
Biotechnology and reindustrialization concepts are expected to benefit from relatively low interest rate environments due to their longer duration characteristics.
Additionally, the mid- to long-term logic of growth stocks has not changed due to short-term fluctuations.

In fixed income: After exceeding 4.5% in 10Y yields, there is limited room for further increases.

In digital currencies: MSTR and U.S. institutional buying have paused, but momentum should return after January.

Investors can seek entry opportunities amid volatility.

My View

Finally, I believe the current macro environment does not support large-scale reductions in positions, as what affects U.S. stocks more are corporate and economic fundamentals rather than interest rates. For example, NVIDIA has recently pulled back, but its fundamentals remain clear (such as long-term growth in data centers and artificial intelligence demand). Especially, the CES in 2025, earnings reports, and the GPU Technology Conference (GTC) will continue to provide catalysts.

In the long run, the Federal Reserve's policy path will be gradual and cautious. In the face of short-term fluctuations, investors need to maintain rationality and focus on economic fundamentals rather than being driven by dot plots or market emotions.

While risks exist, as Powell once pointed out, 'the sustained change in financial conditions is the core focus of policy.' Therefore, I will continue to maintain a moderately optimistic attitude towards risk assets and seek long-term value amid short-term fluctuations.