Index > Briefing
Wednesday, May 05, 2021
Risks in U.S. Stock Market should not be Underestimated

During China's May Day holidays, the international capital market was not active and continued to wander downwards. With the exception of commodity prices, which rose significantly, all major markets generally fell, among which the drop was more obvious on May 4. On that day, led by the U.S. stock market, the world's major markets fell sharply. Wall Street technology stocks continued to lead the market lower on the day, though losses were trimmed late in the session. On May 4, the Dow closed up 0.06%, the S&P fell 0.67% and the Nasdaq fell 1.88%, its third straight day of losses and its worst one-day performance since March. All three major European indexes fell on the day. By the close of trading, stocks in the U.K., France, and Germany were down 0.67%, 0.89%, and 2.49%, respectively. The market is concerned that the Federal Reserve may scale back economic stimulus measures early. Many analysts believe that the U.S. stock market could very well usher in turbulence.

The main reason for the decline in U.S. stocks, especially the sharp drop in the Nasdaq market, was a speech by U.S. Treasury Secretary Janet Yellen. She said U.S. President Joe Biden's spending plans of boosting economic growth and higher interest rates may be needed to stop the economy from overheating. Yellen's comments deepened the decline in technology stocks and sent long-term Treasury yields higher. She later provided clarification to calm the markets, and it was not within her expectation that the inflation would be a problem for the U.S. economy; even if prices rise as a result of supply chain shortages and oil prices rebounding to pre-pandemic levels, it will be short-lived. In addition, Yellen said she was neither expecting nor recommending a rate hike.

Yellen's comments, which do not represent the Fed, still spooked U.S. stocks, sending tech stocks closing lower. Shares of Apple and Amazon fell more than 4% and 2% respectively; shares of Facebook, Netflix, and Google's parent company, Alphabet, all fell less than 2%. Despite the Fed's recent insistence at its latest meeting that it would not change its policy, market analysts believe the tech sell-off was mainly due to fears of a surprise Fed rate hike. While Yellen, as the Treasury Secretary, does not have the power to change the Fed's monetary policy, her role as a former Fed chair retains some influence and may reflect the views of some Fed officials, which is the reason for the "panic" in the capital markets.

Over the past year, after a sustained rally in the wake of the COVID-19 pandemic, the U.S. stock market has shrugged off the negative impact of the pandemic and kept breaking all-time highs. For the time being, the continued rally in the U.S. equities is leading to a stampeding of retail investors into the stock market. According to the latest data from JPMorgan Chase, U.S. households' share of equity holdings rose to 41% of their total financial assets in April, the highest on record. The report attributed this to a rise in share prices and an increase in the number of shares bought by retail investors. Bank of America said in an April 27 report that its retail clients have been buying stocks for nine straight weeks, while hedge funds and other large institutional investors have recently fled the market. Institutional investors are also increasingly concerned about future stock market falls. Analysts at J.P. Morgan believe that their stock allocation is currently in a high-risk position, not unlike the scenario before the dot-com bubble in 2000. This means that the market risk has been constantly accumulating and any changes will cause shock in the stock market.

The "boom" in the financial markets has made market investors particularly sensitive to the policy information. Especially since the beginning of this year, as the prospects of the U.S. economic recovery are increasingly optimistic, the fear of rising inflation has lingered in the market, and the rise of U.S. long-term Treasury bond yields has repeatedly caused market volatility. In fact, as ANBOUND has pointed out, the current boom in the capital markets is dependent on the large amount of liquidity released by the Fed's ultra-loose policy. The over-issuance of global currencies has made capital markets increasingly dependent on liquidity policies.

Although the U.S. economy has begun to recover, the market's inflated bubble has far outstripped the recovery and development of the real economy, thus making it more difficult to withstand rising inflation and a shift in Fed policy. The Fed has been guiding the market with moderate inflation expectations and the prospect of economic recovery, showing that the U.S. policy authorities are very concerned about the volatility of the capital markets, and the market is quite sensitive to policy moves. The continued rise in the market not only poses an unprecedented challenge to the policy authorities, but also makes investors increasingly worried about the future policy direction. In current circumstances, the trend in the U.S. market may not be what the policy authorities are hoping for, and it will erode the recovery of the real economy.

Final analysis conclusion:

The volatility in the U.S. stock market amid rising inflation expectations suggests that the market is still not fully prepared for changes in inflation and interest rates. Even in a recovering economy, a modest rise in inflation can still be very damaging. Even if the Fed does not change policy rates in the near term, it will still bring about a change in market expectations and increase market volatility.

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