U.S. stocks fall again, the Federal Reserve’s “psychological defense” where?
U.S. stocks suffered their biggest one-day drop in nearly a year as tightening and growth fears returned.After a four-day rally, U.S. stocks returned to negative territory on Feb. 3, with the S&P 500 falling 2.4 percent, its biggest daily decline since February 2021.We believe there are two main reasons. On the one hand, the immediate trigger is the weaker-than-expected performance of heavy tech stocks, with Facebook parent Meta reporting its first decline in daily active users and a weaker-than-expected revenue in the first quarter of this year under competitive pressure.That suggests the relative growth advantage that some tech stocks enjoyed during the pandemic is fading as the epidemic moderates.On the other hand, European bond yields surged as policy tightening continued.After the hawkish Federal Reserve in January, the Bank of England raised interest rates by 25bp in two consecutive meetings on February 3. The “big dove” European Central Bank also hinted that it would not rule out the possibility of raising interest rates this year. The UK and German 10-year government bond yields both recorded a sharp rise.The Fed’s view on U.S. stocks: Not that it doesn’t care, but that it hasn’t fallen hard enough.Since 2022, the US stock market continued to adjust, with the biggest decline of more than 12% this year, but this did not stop the Determination of the Federal Reserve to accelerate tightening.The January rate-setting meeting revealed hawkish signals that up to seven rate hikes are possible this year and that the shrinking of the balance sheet may be brought forward to July.Asked at a post-meeting news conference about recent financial market volatility, Fed Chairman Jerome Powell said he would need to see changes in financial market conditions that were “sustained” or material enough to jeopardize the fed’s economic goals before he would respond.So how much does the market have to fall to be a ‘material enough change’?What other changes in financial markets are worth watching?The STOCK market: a 10% pullback is a barrier, a 20% pullback is the limit.We have analyzed the relationship between the us stock market retreat and the Fed’s interest rate hike from two dimensions.The first is how much the S&P 500 has retreated from the previous 12-month high (the retracement) on the day of each meeting (Figure 1). The second is how much the monthly low of each meeting (the maximum retracement) has retreated from the previous 12-month high (Figure 2).Historically, the retracement range is more than 10%, and the maximum retracement range is more than 15%. The Fed will be more cautious about tightening operations such as raising interest rates.The fed did not raise interest rates again. This extreme scenario was once seen in December 2018. Interestingly, a 20% decline is also considered the threshold for a technical bear market.Fed: Pull back more than 10%, reduce tightening expectations;Retracting more than 20% and stopping the tightening.Using history as a guide, we look back at four U.S. stock market retractions of 10% or more since 2009 (excluding January 2022) when the Fed tightened monetary policy.It is mainly concentrated in two phases: around the first fed rate hike in the second half of 2015 and early 2016;2018, the end of the last Fed tightening cycle (Table 1).What did the Fed do?How does the market play out?2015-2016: The Fed Taper Taper ended in October 2014 and the market waited for the landing of the rate increase. The basic expectation at the beginning of 2015 was for one rate increase in June and one in December.However, due to the turbulence in emerging markets (such as China’s economic downturn, the reform of RMB exchange rate, etc.), the collapse of crude oil prices, the US stock market also fluctuated and fell. In response to the Federal Reserve’s continued reduction of interest rate hike expectations, the stock market stabilized in September and rebounded in October.It was not until the October meeting minutes released in early November that a more certain signal of a rate hike in 2015 was revealed (Figure 3).After the first interest rate hike in December 2015, the stock market continued to plunge (also influenced by the depreciation of RMB exchange rate and the “circuit breaker” of Chinese stock market). In January 2016, the Federal Reserve issued another “dove”, which once led to the expectation of no interest rate hike within the year, and also helped the US stock market to stabilize and rebound in February (Figure 4).From January to February 2018: From the end of January to the beginning of February 2018, the U.S. stock market plunged against an important background of the Hawkish wording of “further” interest rate hikes by the Federal Reserve combined with the non-farm data released on February 2, which exceeded expectations. The low point of the U.S. stock market decline appeared in early February, but the overall decline continued until the end of March.The Fed was decidedly dovish at its rate-setting meeting on March 21st.It did not raise the dot plot or signal that it would raise interest rates four times this year until the June meeting after the stock market stabilized.December 2018:The market likes to compare January 2022 with October 2018, and there are indeed similarities in the stock market. On October 3, 2018, Powell said in an interview that “there is still more room to raise interest rates than neutral”, which started the stock market plunge. After the last interest rate hike in December, monetary policy will return to loose in 2019.Stockmarkets duly rebounded (chart 5).With little chance of a repeat, the biggest difference between 2022 and 2018 May be the position of the cycle.Although market heating up in January 2022 policy tightening expectations and Powell for years to raise interest rates seven times opening remarks to U.S. stocks back sharply, but in 2022 the U.S. economy is still in the recovery phase, and in 2018 the end of the cycle of existence very big different, this means that the 2022 economic, policy, and the performance of the market will not go in 2018.We expect a more than 10% correction and the Fed’s March 2022 rate-setting meeting could send a less dovish signal than the market expects.In March, the Fed will release the dot plot. We expect the dot plot to be more divergent, but the median forecast is likely to fall short of the market’s expectation of more than 4 rate hikes this year, a signal that will help the stock market stabilize and rebound.We have also noted that some fed officials who had previously been hawkish have begun to soften their rhetoric. For example, Atlanta Fed President Donald Bostick said on Monday (January 31) that a 50bp rate hike was not his first choice for March.In addition to equities, credit spreads are an important market indicator that influences the Fed.In addition to the stock market, the credit bond market is also an important part of direct financing in the United States. The credit spread is an important indicator to measure the health of the market. When the BBB credit spread (the lowest level of investment grade) exceeds 200bp, the Federal Reserve will act decisively to support the market (Figure 6).Risk warning: the mutation and spread of the epidemic exceed expectations;Related report: 7 rate hikes + Shrinking balance sheet: Unbearable weight for the market in 2022?Infrastructure “bright card”, that infrastructure stocks?(Tao Chuan, Shao Xiang) Dynamic tracking of global supply chain pressure — New York Federal Reserve New indicators analysis (Tao Chuan, Duan) LPR still has the possibility of downside, the next rate cut window in March (Tao Chuan) also need to pay attention to the Interest rate differential between China and the United States?Soochow Macro wishes you a happy New Year!This public subscription account (wechat account: Chuanread Global Macro) is established by the macro team of Soowu Securities Research Institute, and is the only subscription account for the research results of this research team.The information contained in this public account is only for professional investment institutions, only for the timely exchange of research views in the context of new media.This subscription number not soochow securities research institute, publishing platform macro team study carries the content are from Yu Dongwu securities research institute has officially published research reports or to tracking and reading has issued a report, if you need to know the detailed content of the report or research information, detail please see soochow securities research institute published a full report.The contents contained in this subscription number do not constitute judgment or investment advice on specific securities at specific price, specific time point or specific market performance, and cannot be equivalent to operational advice guiding specific investment.The contents contained in this Subscription number are for reference only and the recipient shall not rely solely on the information contained in this material in lieu of its own independent judgment and shall make investment decisions at its own risk.Soochow Securities Research Institute and the research team do not assume any liability for any loss arising from or likely to arise from the use of any content contained in this subscription number.This subscription number reserves all legal rights in the content.All contents (including words, pictures, videos, etc.) published by the subscriber to this subscription number shall not be copied or reproduced without written permission;Authorized to copy, reprint, need to indicate the source as “Dongwu Securities Research Institute”, and shall not carry out any of the content of the subscription number to quote, delete or modify the original meaning.