Author: jinze
Last night, the market experienced a significant pullback, mainly due to investors' concerns about the Federal Reserve potentially shifting to a more "hawkish" policy path. This sentiment triggered widespread selling, particularly in growth stocks and technology stocks. Although the market reaction was violent, I believe we need to analyze the current macroeconomic environment and policy dynamics more deeply to avoid being misled by short-term fluctuations.
Policy Interpretation: The Appearance and Underlying Logic of Hawkishness
The policy signals released by the Federal Reserve mainly focused on "slowing the pace of rate cuts" and "being more data-dependent." Powell clearly stated that the Federal Reserve will be highly sensitive to future economic data, and the path of rate cuts in 2025 may include three rate cuts, but the possibility of a pause or adjustment in the pace is not ruled out. The dot plot showing three rate cuts is slightly more conservative than the previous market expectations, and the market therefore believes that the Federal Reserve is trying to convey a hawkish signal, and the actual rate cuts may be less than three.
However, looking at the details of the broader context, this "hawkishness" is more of an appearance:
The economic fundamentals remain resilient, with U.S. GDP growth reaching 3.1% (based on the Atlanta Fed's GDP forecast data), and the economic surprise index remaining moderately above average, indicating that economic activity remains stable.
The labor market is showing signs of weakness, with the unemployment rate rising 0.7% since June 2023, and the degree of labor market tightness has eased (referring to the labor market tightness indicator in the Federal Reserve's report).
The core inflation trend is stabilizing, with the core PCE inflation rate stable at around 3%, and although it has not declined rapidly, there is no obvious upward pressure.
More Reasons for the Market's Steep Decline Last Night
The market's decline was not only due to the interpretation of the Federal Reserve's policy, but also related to the following factors:
The impact of rising secondary market interest rates, with the Financial Conditions Index (FCI) rising slightly last week, U.S. bond yields returning to their highs from six months ago, and mortgage rates rising 1.5% since September, dampening real estate demand, etc., but the market had previously ignored this due to Trump's victory.
Technical factors in the market, as the S&P 500 index is near its historical highs, but only 45% of its components are above their 50-day moving averages, indicating a lack of internal breadth in the market. This "narrow market" phenomenon has exacerbated stock volatility.
Changes in capital flows, with trading volume surging significantly last night (16 million shares traded, far exceeding the annual average of 12 million), reflecting institutional investors' risk-averse behavior and the urgency of year-end capital reallocation (funds generally need to reduce holdings of assets that have risen the most).
Is the Market's Panic Reasonable?
I believe that the market's panic last night had a certain degree of overreaction, although the lack of positive news at the end of the year and the pullback of assets that have risen too much before encountering unexpected negative variables are reasonable. In fact, even if the Federal Reserve is "hawkish," it is more likely to signal a "gradual rate cut" through the dot plot, and it is still a long way from shifting to a tightening monetary policy. Currently, the U.S. economy is showing a certain degree of resilience, not overheating or free-falling. This economic performance is sufficient to support the market's fundamentals.
At the same time, the market's selling reflects more of an uncertainty about the future and a misinterpretation of policies, rather than a deterioration of the fundamentals. For example, although financial conditions have tightened slightly over the past week, they are still in the loose range. The market has overly focused on short-term changes in the dot plot and ignored the importance of long-term economic trends, which is something to be wary of.
Divergence of Market Bull and Bear Views
Market participants' interpretations of interest rate policy expectations are clearly divided, but both sides have their own sufficient reasons:
Dovish View
The rise in credit card delinquency rates indicates increasing financial pressure on consumers.
The problem of maturing commercial real estate (CRE) debt may trigger liquidity risks.
The decline in commodity prices and the risk of deflation in the Chinese economy are putting downward pressure on the global economy.
Hawkish View
Actual economic growth remains strong, with no obvious signs of recession in the short term.
Core inflation is stable at around 3%, and the high fiscal deficit is exacerbating long-term inflationary pressures.
If financial conditions gradually ease, they may reignite inflation.
Risks and Opportunities Coexist
I believe that the current market decline provides an opportunity for investors to reflect. From a risk perspective, there may be several challenges, such as the possibility of a resurgence of inflation, the hidden dangers of high fiscal deficits, the turmoil that may be caused by DOGE's mass layoffs, and the possibility of selling the fact after Trump's formal inauguration in January, of course, attention should be paid to the distinction between long-term and short-term impacts, with the first two being long-term issues that will require data over several months to substantiate, while the latter two are short-term impacts that may not even materialize.
From an opportunity perspective, the market's steep decline also means opportunities for some risk assets.
For example:
Biotechnology and re-industrialization concept stocks, due to their relatively long duration, are expected to benefit in a relatively low-interest-rate environment.
Furthermore, the long-term logic of growth stocks has not changed due to short-term fluctuations.
In the fixed-income market: The upside potential for 10Y yields is limited after exceeding 4.5%.
In the digital currency market: MSTR and institutional buying in the U.S. may pause for now, but the momentum should return after January.
Investors can seek investment opportunities in the midst of volatility.
My Perspective
Finally, I believe that the current macroeconomic environment still does not support large-scale de-risking, as the factors affecting the U.S. stock market are more related to corporate and economic fundamentals rather than interest rates. For example, NVIDIA's recent pullback, but its fundamental support remains clear (such as the long-term growth in data center and artificial intelligence demand). Especially the 2025 CES, earnings reports, and technology conferences (GTC) will continue to provide catalysts for it.
In the long run, the Federal Reserve's policy path will be gradual and cautious. Faced with short-term volatility, investors need to maintain rationality, focus on economic fundamentals, and not be driven by the dot plot or market sentiment.
Although risks exist, as Powell has pointed out, "the sustained changes in financial conditions are the core of policy focus." Therefore, I will continue to maintain a moderate optimistic attitude towards risk assets and seek long-term value in the midst of short-term volatility.
Last night, the market experienced a significant pullback, mainly due to investors' concerns about the Federal Reserve potentially shifting to a more "hawkish" policy path. This sentiment triggered widespread selling, particularly in growth stocks and technology stocks. Although the market reaction was violent, I believe we need to analyze the current macroeconomic environment and policy dynamics more deeply to avoid being misled by short-term fluctuations.
Policy Interpretation: The Appearance and Underlying Logic of Hawkishness
The policy signals released by the Federal Reserve mainly focused on "slowing the pace of rate cuts" and "being more data-dependent." Powell clearly stated that the Federal Reserve will be highly sensitive to future economic data, and the path of rate cuts in 2025 may include three rate cuts, but the possibility of a pause or adjustment in the pace is not ruled out. The dot plot showing three rate cuts is slightly more conservative than the previous market expectations, and the market therefore believes that the Federal Reserve is trying to convey a hawkish signal, and the actual rate cuts may be less than three.
However, looking at the details of the broader context, this "hawkishness" is more of an appearance:
The economic fundamentals remain resilient, with U.S. GDP growth reaching 3.1% (based on the Atlanta Fed's GDP forecast data), and the economic surprise index remaining moderately above average, indicating that economic activity remains stable.
The labor market is showing signs of weakness, with the unemployment rate rising 0.7% since June 2023, and the degree of labor market tightness has eased (referring to the labor market tightness indicator in the Federal Reserve's report).
The core inflation trend is stabilizing, with the core PCE inflation rate stable at around 3%, and although it has not declined rapidly, there is no obvious upward pressure.
More Reasons for the Market's Steep Decline Last Night
The market's decline was not only due to the interpretation of the Federal Reserve's policy, but also related to the following factors:
The impact of rising secondary market interest rates, with the Financial Conditions Index (FCI) rising slightly last week, U.S. bond yields returning to their highs from six months ago, and mortgage rates rising 1.5% since September, dampening real estate demand, etc., but the market had previously ignored this due to Trump's victory.
Technical factors in the market, as the S&P 500 index is near its historical highs, but only 45% of its components are above their 50-day moving averages, indicating a lack of internal breadth in the market. This "narrow market" phenomenon has exacerbated stock volatility.
Changes in capital flows, with trading volume surging significantly last night (16 million shares traded, far exceeding the annual average of 12 million), reflecting institutional investors' risk-averse behavior and the urgency of year-end capital reallocation (funds generally need to reduce holdings of assets that have risen the most).
Is the Market's Panic Reasonable?
I believe that the market's panic last night had a certain degree of overreaction, although the lack of positive news at the end of the year and the pullback of assets that have risen too much before encountering unexpected negative variables are reasonable. In fact, even if the Federal Reserve is "hawkish," it is more likely to signal a "gradual rate cut" through the dot plot, and it is still a long way from shifting to a tightening monetary policy. Currently, the U.S. economy is showing a certain degree of resilience, not overheating or free-falling. This economic performance is sufficient to support the market's fundamentals.
At the same time, the market's selling reflects more of an uncertainty about the future and a misinterpretation of policies, rather than a deterioration of the fundamentals. For example, although financial conditions have tightened slightly over the past week, they are still in the loose range. The market has overly focused on short-term changes in the dot plot and ignored the importance of long-term economic trends, which is something to be wary of.
Divergence of Market Bull and Bear Views
Market participants' interpretations of interest rate policy expectations are clearly divided, but both sides have their own sufficient reasons:
Dovish View
The rise in credit card delinquency rates indicates increasing financial pressure on consumers.
The problem of maturing commercial real estate (CRE) debt may trigger liquidity risks.
The decline in commodity prices and the risk of deflation in the Chinese economy are putting downward pressure on the global economy.
Hawkish View
Actual economic growth remains strong, with no obvious signs of recession in the short term.
Core inflation is stable at around 3%, and the high fiscal deficit is exacerbating long-term inflationary pressures.
If financial conditions gradually ease, they may reignite inflation.
Risks and Opportunities Coexist
I believe that the current market decline provides an opportunity for investors to reflect. From a risk perspective, there may be several challenges, such as the possibility of a resurgence of inflation, the hidden dangers of high fiscal deficits, the turmoil that may be caused by DOGE's mass layoffs, and the possibility of selling the fact after Trump's formal inauguration in January, of course, attention should be paid to the distinction between long-term and short-term impacts, with the first two being long-term issues that will require data over several months to substantiate, while the latter two are short-term impacts that may not even materialize.
From an opportunity perspective, the market's steep decline also means opportunities for some risk assets.
For example:
Biotechnology and re-industrialization concept stocks, due to their relatively long duration, are expected to benefit in a relatively low-interest-rate environment.
Furthermore, the long-term logic of growth stocks has not changed due to short-term fluctuations.
In the fixed-income market: The upside potential for 10Y yields is limited after exceeding 4.5%.
In the digital currency market: MSTR and institutional buying in the U.S. may pause for now, but the momentum should return after January.
Investors can seek investment opportunities in the midst of volatility.
My Perspective
Finally, I believe that the current macroeconomic environment still does not support large-scale de-risking, as the factors affecting the U.S. stock market are more related to corporate and economic fundamentals rather than interest rates. For example, NVIDIA's recent pullback, but its fundamental support remains clear (such as the long-term growth in data center and artificial intelligence demand). Especially the 2025 CES, earnings reports, and technology conferences (GTC) will continue to provide catalysts for it.
In the long run, the Federal Reserve's policy path will be gradual and cautious. Faced with short-term volatility, investors need to maintain rationality, focus on economic fundamentals, and not be driven by the dot plot or market sentiment.
Although risks exist, as Powell has pointed out, "the sustained changes in financial conditions are the core of policy focus." Therefore, I will continue to maintain a moderate optimistic attitude towards risk assets and seek long-term value in the midst of short-term volatility.
